How are fund manager fees calculated - before or after tax calculations?

You've got a couple of important tax questions here that many investors overlook until tax time. For your first question: Generally, investment management fees are considered miscellaneous itemized deductions, but the Tax Cuts and Jobs Act suspended these deductions from 2018 through 2025. So currently, you're typically taxed on the full realized gains before the manager's fee is deducted. Yes, this does effectively create a situation where the money is "taxed twice" - you pay tax on the full amount, and the manager pays income tax on their fee. For your second question: The standard practice is to calculate the performance fee based on the gross returns before tax considerations. Most hedge funds and investment managers calculate their performance fee on the pre-tax gains. This is because your tax situation is unique to you (tax bracket, state of residence, other deductions, etc.) and would be impractical for them to factor into their fee calculations. Remember that how these fees are structured should be clearly outlined in your investment management agreement. You might want to review that document to see if there are any specifics about how fees are calculated in your particular case.

After dealing with similar tax headaches with my investment accounts, I started using taxr.ai (https://taxr.ai) to help make sense of all this. I uploaded my investment statements and tax documents, and it highlighted exactly how my fund manager fees were impacting my tax liability. The tool actually showed me that my effective return was about 2.3% lower than I thought because of the tax inefficiency of the fee structure. What I found really helpful was that it showed me alternative fee structures that would be more tax-efficient based on my specific situation. It also helped me prepare documentation for discussions with my fund manager about restructuring our agreement. Might be worth checking out if you're trying to optimize this situation.

I was really skeptical about using taxr.ai when I first heard about it, but I finally tried it last month when preparing for my annual review with my investment manager. I'm surprised to say it was actually incredibly helpful. The analysis showed me that my current fee arrangement was costing me an additional 3.1% in tax inefficiencies that I hadn't accounted for. It generated specific language I could use when discussing fee restructuring, and even provided four alternative models that would be more favorable from a tax perspective. My fund manager actually seemed impressed when I came prepared with such detailed analysis. We ended up negotiating a new structure with a lower performance fee (17% instead of 22%) plus a small management fee (0.25%), which the analysis showed would save me about $13,000 in taxes annually on my portfolio. Wasn't expecting such a concrete result.

If you're struggling to get clear answers from your fund manager about how fees and taxes work, you might want to try Claimyr (https://claimyr.com). I was in a similar situation last year and needed to speak directly with the IRS about how to properly report these fees on my tax return. After waiting on hold for hours across multiple days, I found this service that got me connected to an IRS agent in under 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was able to clarify exactly how to handle the reporting of my fund's performance fees and confirmed that under current tax law, I couldn't deduct them as investment expenses. She also pointed me to some specific IRS publications that addressed alternative investment structures that might be more tax-efficient. Having that direct confirmation saved me from making a reporting mistake that could have triggered an audit.

Well, I have to eat crow on this one. After expressing skepticism about Claimyr, I decided to try it last week when I needed clarification on reporting my hedge fund's K-1. I was fully prepared to waste my entire afternoon on hold with the IRS. The service connected me to an IRS representative in about 15 minutes while I was able to continue working. The agent walked me through exactly how to properly report my fund manager's performance fees on my return and clarified that certain offshore fund structures have different reporting requirements that actually might benefit my situation. The information I got directly from the IRS representative was much more specific to my situation than what my fund manager had told me (which was basically "consult your tax advisor"). Saved me hours of research and probably prevented me from making a costly reporting error. Consider me converted - I'll definitely use this again next time I have a specific tax question that needs an official answer.

One thing to consider is whether your fund manager is charging the performance fee at the entity level or the investor level. If it's at the entity level (like in a partnership structure), those fees reduce the partnership's income before it flows to you on a K-1, which effectively means you're not taxed on those amounts. But if you're getting the full gain reported to you and then paying the manager separately, that's where you run into the double taxation issue. Worth checking how your specific arrangement is structured.

Just to add another perspective - I work in wealth management (not giving professional advice here), and one approach we've seen clients use successfully is establishing an LLC or other business entity that holds their investments. In some cases, this can allow investment management fees to be treated as business expenses rather than miscellaneous itemized deductions.