2025 carried interest tax reform and impact on sponsors and investors

On February 6, 2025, President Donald Trump met with Republican lawmakers to discuss budget priorities, proposing to end favorable taxation for carried interest. On the same day, Democrats introduced bills in both the House and the Senate that would fully eliminate favorable taxation for carried interest.

Below, we provide a background on carried interest and a summary of recent developments.

Background and key highlights

• General partners of private equity, venture capital, and real estate funds often receive compensation in the form of carried interest that is structured to be taxed at a favorable long-term capital gains rate (eg, 20 percent), despite not contributing significant initial capital. In contrast, salary workers are typically taxed on their wage income at ordinary rates (eg, 37 percent).


• The debate over taxing carried interest as ordinary income instead of capital gains dates back to 2006.


• Over the years, various bills and proposals have been introduced to reform carried interest taxation.


• During his first term, President Trump enacted the most significant reform to the taxation of carried interest under the 2017 Tax Cuts and Jobs Act (2017 TCJA). The 2017 TCJA extended the holding period required for carried interest to qualify for long-term capital gains treatment from one year to three years.


• Both the latest proposal by President Trump and the bills introduced by Democrats last week are a significant departure from the 2017 TCJA and would effectively be a full elimination of the taxation of carried interest as capital gains.


• Its proponents consider carried interest an important tool to align the interests of general partners and investors. Opponents of carried interest reform argue that an amendment to the taxation of carried interest could have the unintended effect of misaligning general partner and investor interests, or, in some cases, increasing the net effective cost for investors to participate in fund investments.

To learn more, please contact any member of the DLA Piper Investment Funds practice group. We will continue to monitor this proposal.