Democrats renew mark-to-market, carried interest proposals

Senate Finance Committee Chair Ron Wyden, D-Ore., and 15 other Democrats unveiled a new version of legislation that would levy tax on the unrealized gains of high-income individuals by requiring annual mark-to-market recognition of tradeable assets. The bill follows the release from two weeks earlier of Democratic legislation that would change the tax treatment of carried interest. 

The Nov. 30 mark-to-market bill is the latest iteration of Wyden’s proposal, which he’s pushed since 2019. President Joe Biden has also offered similar proposals. As with Wyden’s version introduced in 2021, also billed as a ‘Billionaire’s Income Tax,’ the legislation would only apply to taxpayers holding over $1 billion in “covered assets” or earning more than $100 million in adjusted gross income over the course of three consecutive years.

The legislation never gained much traction during negotiations for the Build Back Better agenda and the Inflation Reduction Act. This year’s introduction is more about keeping the idea alive rather than seeking to enact law during this current Congress. The legislation remains politically controversial even among Democrats but could be used as fodder in the 2024 campaign.

The core of the legislation, which hews closely to previous versions, would require covered taxpayers to annually mark-to-market tradeable covered assets, which would include any asset traded on an established securities market, readily tradable on a secondary market, or available on an online or electronic platform that regularly matches buyers and sellers of such assets. It would also include derivatives and would grant Treasury authority to add assets if there is a reasonable basis to determine the fair market value annually. The proposal allows for the deduction of unrealized losses, since the taxable event would be a change in value over the course of a year, including a loss in asset price, rather than the sale. It also allows for the carryback of losses if the taxpayer has marked-to-market losses larger than capital gains in a tax year.

For non-tradeable assets, the proposal would impose extra tax upon disposition based on a complex calculation meant to claw back the benefit of deferring tax on appreciation throughout the holding period. The legislation includes several other novel provisions, including:

• Imposing recognition of gain or loss on certain gifts, bequests, and transfers in a trust
• Changing grantor and dynasty trust rules
• Eliminating the ability to defer non-qualified deferred compensation under Section 409A and certain stock option income.

The new carried interest proposal was introduced by Wyden and Sens. Sheldon Whitehouse, D-R.I., and Angus King, I-Maine. The bill would require taxpayers holding certain partnership interests to pay ordinary income tax rates on a “deemed compensation amount,” recognizing a capital loss equal to that amount. It would be calculated annually based on a specific rate using the ratio of a partner’s invested capital to all partners’ invested capital. The provision would apply broadly to partnership interests granted in connection with the performance of services for partnerships involved in specific investment activity. The legislation would also potentially tax the issuance of a compensatory partnership interest based on a liquidation value.

The legislation is one of the most aggressive bills targeting the tax treatment of carried interest. Like the mark-to-market proposal, the legislation will not move any time soon, but could be part of Democratic tax platforms for the 2024 campaign. Various carried interest proposals were offered during negotiations over the Inflation Reduction Act, but ultimately nothing was included, largely due to objections from Sen. Kyrsten Sinema, I-Ariz.