Carried Interest Fairness Act of 2025

Summary

Treats partnership interests granted for investment management services as taxable property and changes how gains and losses from those “investment services” partnership interests are taxed. It recharacterizes carried‑interest style allocations (capital gains) to ordinary income for investment managers, makes that income subject to self‑employment tax rules, and inserts a new statutory regime in Subchapter K to govern these allocations and their tax treatment. The bill phases those rules into taxable years ending after enactment, applies special rules for partnership years that straddle enactment, and makes certain provisions effective on enactment. The changes increase reporting and tax obligations for partners who receive partnership interests for services and for partnerships that allocate investment gains to those partners; they also alter Social Security earnings by including this income as net self‑employment earnings and make conforming edits across Subchapter K and Subchapter O of the Internal Revenue Code.

• Transfers of partnership interests given for services are treated as taxable property under the tax code, with a default election that treats recipients as if they made a section 83(b) election unless they opt out.
• Creates a new section in Subchapter K that recharacterizes capital gains allocated to investment‑service partners as ordinary income and limits how prior losses can offset those recharacterized gains.
• Dividends and gains allocated to these investment services partnership interests are denied lower qualified dividend or section 1202 treatment, increasing ordinary taxable income.
• Income allocated to investment managers from such partnership interests is treated as net self‑employment earnings and becomes subject to Social Security/Medicare self‑employment tax rules.
• Applies to partnership interests and taxable years ending after enactment with special transition rules for partnership years that straddle enactment and for post‑enactment dispositions.
• Requires partnerships and partners to adopt new valuation, allocation, and accounting procedures and prompts updates to IRS and SSA reporting and guidance.
• Includes multiple conforming edits across Subchapter K and O to align statutory cross‑references and remove/relocate affected sections.
• Increases potential federal tax and payroll tax revenue by converting lower‑taxed capital gain allocations into ordinary income for affected partners.
• Limits the ability of affected partners to claim capital‑gain tax benefits (e.g., lower rates or section 1202) on recharacterized items.