YourVoice.Now Summary
Corporate BenefitsTransparency & AccountabilityTaxes hedge fund and private equity managers' profit share as regular income (up to 37%) instead of the lower 20% capital-gains rate.
Corporate Benefits
- Capital gains preference on carried interest — recharacterizes fund managers' profit share as ordinary income, taxed at rates up to 37% instead of the current 20% capital gains rate
- Carried interest self-employment tax exemption — closes the gap that allowed investment managers to avoid Social Security and Medicare taxes on carried interest income
- Qualified small business stock exclusion for carried interest — bars managers from applying the § 1202 gain exclusion to QSBS gains allocated through an investment services partnership interest
- Basis step-up at death on investment services partnership interests — treats unrealized ordinary income as income in respect of a decedent, preventing heirs from inheriting a tax-free stepped-up basis
Transparency & Accountability
- Accuracy-related penalty for carried interest avoidance — doubles the standard penalty to 40% for underpayments resulting from structuring around the new carried interest rules
- Reasonable-cause exception standard for carried interest — requires adequate disclosure, substantial legal authority, and affirmative good-faith belief, a higher bar than the standard exception
The details
Investment fund managers — hedge fund, private equity, and venture capital professionals — currently pay a lower tax rate on their share of fund profits, called "carried interest." That rate tops out at 20%, even though carried interest is pay for services, not their own investment. The Carried Interest Fairness Act of 2025 would close that gap. It recharacterizes all carried interest gains as ordinary income, taxed at rates up to 37%, no matter how long the assets were held. The bill repeals the existing partial reform (IRC Section 1061), which only required a 3-year holding period for the lower rate. It replaces that with a new statute, IRC Section 710, covering income, dispositions, and distributions from these partnership interests. Carried interest income would also become subject to self-employment taxes — Social Security and Medicare — closing a separate avoidance route. Additional anti-gaming rules stop managers from using the qualified small business stock exclusion on carried interest. They also block a step-up in tax basis at death from erasing owed ordinary income. Managers who try to structure around these rules face a 40% accuracy-related penalty, double the standard 20% rate. A tighter reasonable-cause exception requires disclosure, substantial legal authority, and a good-faith belief the treatment was correct.
Congressional Summary
Carried Interest Fairness Act of 2025This bill taxes income from carried interest at ordinary income tax rates and makes other changes related to carried interest. (Some exceptions apply.)As background, a general partner in a private equity firm or hedge fund (typically structured as a partnership) generally receives a share of the profits from the assets managed by the general partner (known as carried interest). Under current law, carried interest is characterized (for federal tax purposes) as an interest in a partnership’s capital and, thus, taxed at capital gains tax rates (which may be lower than the applicable ordinary income tax rates). Under the bill, net capital gain and loss attributable to carried interest is recharacterized as ordinary income and loss and, thus, taxed at ordinary income tax rates. (Some exceptions apply.)The bill also treats as ordinary the money (or fair market value of property) received by a partner in a sale or exchange of carried interest. (Thus, the bill extends what is known as the hot asset rule to include carried interest.)Further, the bill deems distributions of carried interest by a partnership in exchange for interest in other partnership property a sale or exchange of such property and, thus, requires the partner to recognize ordinary gain on the distributed carried interest.Finally, the bill imposes self-employment taxes on carried interest income.
Details
- Congress
- 119th
- Chamber
- House
- Status
- summarized
- Action
- Introduced in House
- Action Date
- 2025-02-06
- Date Added
- 2026-06-05
- Source
- Congress.gov →
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