Carried Interest Fairness Act of 2025

Key Points

• This bill would reclassify the income that investment fund managers earn through "carried interest" as ordinary income instead of capital gains. This means their earnings would be taxed at the higher ordinary income rate (up to 37%) rather than the lower long-term capital gains rate (up to 20%), closing what critics call a major tax loophole for wealthy finance professionals.
• The bill targets people who advise on investments, manage or acquire assets, arrange financing, or provide support services for investment partnerships like private equity funds and hedge funds.
• Fund managers would also have to pay self-employment taxes on this income, which helps fund Social Security and Medicare. Currently, carried interest income is exempt from these payroll taxes.
• Anyone who tries to avoid these rules faces a steep 40% penalty on underpaid taxes, double the usual 20% penalty. The bill also sets a higher bar for claiming a "reasonable cause" defense against these penalties.
• The bill protects people who put their own money into these funds. Income earned on a manager's actual capital contribution (called a "qualified capital interest") is still taxed at the lower capital gains rate, as long as it gets the same treatment as other investors' capital.
• The new rules replace the existing Section 1061 of the tax code, which only required a 3-year holding period for carried interest to qualify for capital gains rates. This bill goes further by treating carried interest as ordinary income regardless of how long the assets are held.