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The newest models MBPro (2023) do, in fact, support HDMI 2.1
So, I suspect that the answer to your question would be: It is a hardware limitation on the early M1/M2 models, and is now updated on the 2023 to support HDMI 2.1
 
I know some of the newest models have a HDMI 2.1 port. I had them. However, if I want to use more than one displays that support new features of HDMI 2.1, I am limited by HDMI 2.0b through TB ports. Having USB-C to HDMI 2.1 adapter does not help because of such limitation of Silicon Mac.
 
Software issue. Apple Silicon has always supported DisplayPort 1.4 with DSC so you should be able to connect a DisplayPort to HDMI 2.1 adapter. If it doesn't work then it's because Apple didn't put the work in to make it work.
 
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Is this a hardware or software limitation?
Bandwidth limitation.

HDMI 2.1 requires at least 48Gbps of bandwidth. While all the thunderbolt ports can handle only 20-40Gbps each.

Wait for Thunderbolt 5 Macs, with 80Gbps bandwidth per port, which means every port can handle 4K/120Hz monitor, uncompressed.
 
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Bandwidth limitation.

HDMI 2.1 requires at least 48Gbps of bandwidth. While all the thunderbolt ports can handle only 20-40Gbps each.

Wait for Thunderbolt 5 Macs, with 80Gbps bandwidth per port, which means every port can handle 4K/120Hz monitor, uncompressed.

Thanks.

When will Thunderbolt 5 Macs be available? I think I read 2024.
 
Bandwidth limitation.

HDMI 2.1 requires at least 48Gbps of bandwidth. While all the thunderbolt ports can handle only 20-40Gbps each.

Wait for Thunderbolt 5 Macs, with 80Gbps bandwidth per port, which means every port can handle 4K/120Hz monitor, uncompressed.
"at least" is incorrect. 48 Gbps is the max bandwidth of HDMI 2.1. Some HDMI 2.1 TV's can't do 48 Gbps. There's different levels of HDMI 2.1:

14.4 Gbps - 3 lane TMDS 6 Gbps (same as HDMI 2.0)
21.33 Gbps - 4 lane FRL 6 Gbps
28.44 Gbps - 4 lane FRL 8 Gbps
35.56 Gbps - 4 lane FRL 10 Gbps
42.67 Gbps - 4 lane FRL 12 Gbps

DisplayPort 1.4 HBR3 can do 25.92 Gbps which is better than FRL 6 Gbps and near FRL 8 Gbps.

With DSC@12bpp, HBR3 can do 2160 MHz which is enough for 8K60 CVT-RB and maybe enough for 4K240 if you greatly reduce the blanking.

4K120 should not be a problem. It is only 1075 MHz (CVT-RB2). Without DSC, HBR3 can do it at @ 8bpc (not HDR), same as FRL 8Gbps. DSC or FRL 10Gbps is required for 10bpc (HDR). HDMI timing is 1188 MHz which requires DSC until you get to FRL 10Gbps for 8bpc or FRL 12Gbps for 10bpc.
 
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It seems to be a MacOS issue. Look at that very lengthy thread about USB-C to HDMI 2.1 adapters and you will find some of them will work now but most have issues, limiting them to HDMI 2.0 speeds. Meanwhile plugging in the exact same adapter to a PC will work without issues based on my experience.

Most HDMI 2.1 devices are either 40 Gbps or full 48 Gbps. 40 Gbps is enough for 4K 120 Hz + 10 bit color + HDR. There are a few monitors that are just 24 Gbps and use DSC to reach their rated res/refresh rates over HDMI 2.1. These are more likely to have issues with MacOS because DSC support seems to be a total crapshoot on them.
 
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