Carried Interest Fairness Act of 2025
Sponsored By: Representative Perez
Introduced
Summary
Recharacterizes many carried interest gains as ordinary income. The Carried Interest Fairness Act of 2025 would create a new Subchapter K regime that treats many allocations to investment managers as ordinary income and adds matching rules for dispositions, distributions, reporting, and enforcement.
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- Investment managers and partners: Net capital gains and many disposition gains allocated to an "investment services partnership interest" would be treated as ordinary income. Dividends allocated to those interests would not be treated as qualified dividend income.
- Investment funds and investors: Portions of a service partner's interest that qualify as a "qualified capital interest" could remain capital if allocations mirror those for non‑service partners. The bill would also exclude specified carried interest income from qualifying income for publicly traded partnerships with a 10‑year transition for that rule.
- Tax administration and Social Security: The bill would require extra reporting and recordkeeping, raise the accuracy‑related penalty to 40 percent for certain avoidance conduct, and treat income recharacterized as ordinary as self‑employment earnings for Social Security purposes.
Section 710(e) would be effective on enactment and other rules generally would apply to taxable years ending after enactment.
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Bill Overview
Analyzed Economic Effects
8 provisions identified: 0 benefits, 5 costs, 3 mixed.
Carried-interest income taxed at ordinary rates
If enacted, net capital gains you get through a carried interest would be taxed at ordinary rates. Losses would be ordinary too, but only up to prior amounts already treated as ordinary. Dividends tied to a carried interest would not be qualified dividends. Gains from qualified small business stock allocated to a carried interest would not get the QSBS exclusion. Income tied to certain “disqualified” interests, including some SPAC setups, could also be taxed as ordinary if the value is tied to the assets you manage.
Higher penalties for avoiding carried-interest rules
If enacted, the accuracy penalty would rise to 40% for underpayments tied to avoiding the carried‑interest rules. The usual reasonable‑cause relief would be harder to claim. You would need to disclose the facts, have substantial authority, and reasonably believe your position was more likely than not correct.
Tax on partnership interests for services
If enacted, a partnership interest you get for services would be valued as if the partnership sold everything and paid out cash. You would be treated as making an 83(b) election unless you opt out on time. This would apply only to interests transferred after enactment.
Taxes on selling or distributing carried interests
If enacted, selling a carried interest would produce ordinary income, and losses would be limited by earlier ordinary amounts. Distributions tied to a carried interest could trigger gain at fair market value, and your basis in distributed property would be fair market value. Gifts or transfers at death would not trigger the sale rule, but income would carry over to the recipient. You could make an irrevocable election in some contribution exchanges to treat the received interest as a carried interest. The bill would also expand current rules so indirect sales and some distributions in tiered partnerships are ordinary income events, with Treasury setting valuation methods.
Self-employment tax on carried interest
If enacted, income or loss from a carried interest would count in your self‑employment earnings. Many service partners would pay more self‑employment tax. These earnings would also add to your Social Security record, which could raise future benefits.
PTPs face new limits on carried interest
If enacted, income tied to carried interest would no longer count as qualifying income for publicly traded partnerships. That could affect PTP tax status and investor tax reporting. A transition would delay this until partnership years that begin 10 years after enactment.
Who counts as a carried-interest holder
If enacted, the bill would define when a partnership interest is a carried interest (called an investment services partnership interest). A partnership would be an investment partnership if, for two straight quarters, it mainly holds investment‑type assets and less than 75% of capital is true operating capital. Parts you bought with your own real capital could keep capital‑gain treatment, but only if strict, equal‑treatment tests are met and allocations to unrelated non‑service partners are significant. Using loans or partner advances to buy the interest could block that break. Family partnerships could get a limited exception if they meet tight conditions and do not hold out as an investment adviser.
More reporting and tracking for partnerships
If enacted, Treasury could require new reports and records to enforce these rules and stop avoidance. Partnerships would need to track recharacterized amounts in a separate bucket. The tax code would be updated so the new rules link to other sections.
Sponsors & CoSponsors
Sponsor
Perez
WA • D
Cosponsors
Beyer
VA • D
Sponsored 2/6/2025
Lofgren
CA • D
Sponsored 5/20/2025
Roll Call Votes
No roll call votes available for this bill.
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