​Carried Interest: Its History, Tax Code Definition, Controversy, Presidential Efforts for Reform, and Current News

Definition and Tax Code Reference​

Carried interest is a share of the profits that investment managers, particularly those in private equity and hedge funds, receive as compensation. Typically, this amounts to about 20% of the fund's profits, rewarding managers for enhancing investment performance. In the United States, carried interest is taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate. ​

Historical Context​

The concept of carried interest dates back to the 16th century, when ship captains received a 20% share of the profits from the goods they transported, compensating them for the risks of long voyages. Today, the term applies to the compensation structure in investment management, maintaining the traditional 20% profit share. ​

Controversy Surrounding Carried Interest​

The primary controversy revolves around the taxation of carried interest. Critics argue that investment managers benefit from a tax loophole by paying the lower capital gains tax rate on income that resembles a performance-based fee, which would typically be taxed as ordinary income. This disparity allows high-income managers to pay a lower tax rate compared to other professionals earning similar income levels. ​

Presidential Attempts to Reform Carried Interest Taxation​

Several U.S. presidents have attempted to reform the taxation of carried interest:​

• Barack Obama: His administration proposed taxing carried interest as ordinary income in multiple budget proposals, aiming to eliminate the preferential tax treatment. ​

• Donald Trump: During his 2016 campaign, Trump pledged to eliminate the carried interest loophole. However, the 2017 Tax Cuts and Jobs Act only modified the holding period requirement from one year to three years for carried interest to qualify for long-term capital gains treatment, leaving the core tax benefit largely intact. ​

  
  

Current Developments​

As of early 2025, carried interest taxation has resurfaced in policy discussions. President Trump has renewed efforts to close the carried interest tax loophole, proposing its elimination to fund middle-class tax cuts. This move aligns with his broader tax reform agenda and addresses long-standing criticisms of the tax code favoring wealthy financiers. ​

Conclusion​

Carried interest remains a contentious topic in U.S. tax policy, symbolizing the debate over equitable taxation and economic incentives. Despite repeated attempts at reform, the preferential tax treatment persists, influenced by complex economic arguments and robust lobbying efforts. The ongoing discussions in 2025 indicate that carried interest will continue to be a focal point in the broader conversation about tax fairness and fiscal policy.