If a taxpayer has a capital gain reported by a partnership, how is it treated if they do not actively participate in the partnership?

When a taxpayer receives a capital gain reported by a partnership in which they do not actively participate, this gain is treated as short-term capital gain. The key factor here is the level of participation in the partnership. If the taxpayer does not actively engage in the partnership's business operations, any gains are generally considered short-term, regardless of how long the partnership itself held the asset that generated the gain.

Short-term capital gains are typically taxed at the individual's ordinary income tax rates, which can often exceed the preferential rates applied to long-term capital gains. The treatment as short-term arises from the fact that passive investors in such partnerships do not have control over the timing of the gains or losses, which aligns with the tax code's provision for investors who are not materially involved.

In this context, short-term capital gains lead to a taxed income scenario that aligns with a general treatment of such gains within the framework of passive investment strategies and their corresponding implications on a taxpayer's overall income.