Carried interest — the share of investment profits that fund managers receive as compensation — would be taxed as ordinary income instead of at lower long-term capital-gains rates. The change targets private-equity, hedge-fund, and real-estate fund managers who provide investment-management services through partnerships. Under a new Internal Revenue Code section 710, their share of a fund's capital gains, qualified dividends, and small-business-stock gains would all be recharacterized as ordinary income, taxed at rates up to 37% rather than the 20% top capital-gains rate. Gains from selling the carried-interest stake itself would also be treated as ordinary income, and that income would newly be subject to self-employment tax. Money the managers invest with their own cash (a "qualified capital interest") keeps normal capital-gains treatment, and domestic C corporations are largely exempt. The bill repeals the existing three-year holding-period rule (section 1061) and adds a 40% penalty for underpayments that try to avoid the new rules.
Corporate Benefits
- capital-gains treatment of fund managers' carried interest — taxed as ordinary income
- qualified-dividend treatment on carried interest — dividends taxed as ordinary income
- §1202 small-business-stock exclusion on carried interest — gain fully taxed
- §1061 carried-interest holding-period rule — repealed
- qualifying-income status for carry in publicly traded partnerships — 10-year phase-in
- self-employment tax on fund managers' carried interest — now covers this income
Transparency & Accountability
- reporting and recordkeeping rules for fund managers — Treasury-prescribed
- 40% penalty on underpayments that avoid the new rules — anti-avoidance enforcement
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
- Senate
- Status
- summarized
- Action
- Introduced in Senate
- Action Date
- 2025-02-06
- Date Added
- 2026-06-08
- Source
- Congress.gov →
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