Carried Interest Fairness Act of 2025

Summary

Treats partnership interests received for investment management services (commonly called "carried interest") as ordinary income instead of capital gains, makes those partnership interests taxable at transfer unless the recipient affirmatively opts out, and counts income from those interests as self-employment earnings for Social Security purposes. The bill requires partnerships to track and report such ordinary income and losses separately, disallows certain capital-preference tax benefits (qualified dividends, QSBS exclusion) for those partnership allocations, and includes transition and effective-date rules.

• Partnership interests received for providing investment management services are generally taxable at transfer unless the recipient elects out.
• Long-term capital gain allocated to an investment-services partnership interest is recharacterized as ordinary income.
• Recharacterized capital losses may become ordinary losses but are limited so ordinary losses cannot exceed prior recharacterized ordinary gains.
• Dividends and QSBS gains allocated to these partnership interests lose preferential tax treatment (not qualified dividends; QSBS exclusion not allowed).
• Gain on disposition of an investment-services partnership interest is treated as ordinary income (with narrow exceptions for gifts and transfers at death).
• Income or loss from these partnership interests is treated as self-employment net earnings for Social Security tax purposes.
• Partnerships must perform separate partner accounting and meet new reporting requirements to identify and report recharacterized ordinary items.
• Conforming changes remove certain existing carried-interest rules and update multiple cross-references within Subchapter K and Subchapter O.
• Most changes apply to taxable years ending after enactment, with special transition rules for partnership years that include the enactment date.