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Democrats seek to eliminate ‘carried interest’ loophole

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Tax Hot Topics newsletterSen. Tammy Baldwin (D-Wis.) and Rep. Bill Pascrell (D-N.J.) have introduced a new bill to raise the tax rate on the share of profits attributable to a general partner of an investment fund.

Under current law, those profits, also referred to as “carried interest,” may be taxed at the 20% long-term capital gains rate. Baldwin and Pascrell’s Carried Interest Fairness Act of 2019 would instead tax carried interest as ordinary income, subject to a top individual tax rate of 37%.

The two lawmakers leaned on past promises made by President Donald Trump in an effort to win favor for the legislation. As a candidate, Trump proposed ending the preferential tax treatment for carried interest. However, his signature legislative achievement thus far, the Tax Cuts and Jobs Act, merely limited the benefit by raising the holding period for qualifying investment assets from one year to three years. Profits from investments held for less than three years are treated as short-term capital gain and taxed as ordinary income.

The pay-as-you-go budget rules in place in the House could give revenue offsets like this more traction, but the tax treatment for carried interest has survived many attacks in the past. With Republicans still in charge of the White House and Senate, near-term enactment remains a long shot. The Congressional Budget Office estimates eliminating the preferential treatment for carried interest could raise $14 billion over 10 years.

Contacts:
Dustin Stamper
Managing Director
Washington National Tax Office
T  +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T  +1 202 861 4143

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