On February 6, 2025, the Trump Administration announced various tax and budgetary priorities discussed further here, including closing the “carried interest loophole.” On the same day, Democrats in the House and Senate proposed two identical bills, each referred to as the Carried Interest Fairness Act of 2025 (the “Act”), aimed at closing the carried interest loophole (available here and here, respectively). The carried interest loophole allows investment fund managers to benefit from preferential long-term capital gains rates on what critics maintain is effectively compensation for services. While the specific details surrounding the Trump Administration’s proposal to close the carried interest loophole have not been released, the combination of efforts by the Trump Administration and the proposed bills by House and Senate Democrats indicates bipartisan support for finally closing the carried interest loophole.
Under current law, investment fund managers generally recognize income or gain in respect of their carried interests only when the fund sells assets that give rise to the income or gain. If a sale occurs more than three years after the fund acquired the relevant assets, then investment fund managers generally recognize long-term capital gains rather than ordinary income. The 2017 Tax Cuts and Jobs Act ("TCJA"), enacted during the first Trump Administration, narrowed the carried interest preference by extending the prior one-year holding period requirement to three years, as discussed here and here.
The Act, which largely mirrors a recent bill that we discussed here, would effectively eliminate the carried interest preference altogether (with limited exceptions) by classifying certain net capital gains from an investment services partnership interest as ordinary income, calculating self-employment tax obligations inclusive of such ordinary income, and including in gross income the fair market value (defined as liquidation value) of any partnership interest received in exchange for services.
