Ending the Carried Interest Loophole Act

Bill Number

S. 4330

Origin Chamber

Senate

Congress

119th Congress, Session 2

Policy Area

Environmental Protection

Status

Introduced

Latest Action

2026-04-16: Read twice and referred to the Committee on Finance.

Last Updated

2026-05-15T19:05:26Z

AI-Generated Summary

Purpose

This bill, titled the "Ending the Carried Interest Loophole Act," aims to change how certain ownership shares (partnership interests) in investment partnerships are taxed when received by individuals for performing services. Carried interest refers to a profit share given to investment managers (like in private equity or hedge funds) that is currently often taxed at lower capital gains rates; the bill treats it more like regular salary income (ordinary income), taxed at higher rates.

Key Provisions

• Section 2: Changes to Section 83 (Property Transferred for Services)
• When a partnership interest is given for services, its value is calculated as if the partnership sold all assets at fair market value (FMV) and liquidated, distributing proceeds to partners.
• The recipient must include this value in income immediately (unless they elect out), with amounts added to their capital account.
• Applies to transfers after enactment; covers financial instruments or non-partnership interests treated like partnership interests.
• Treasury Secretary to issue rules for implementation.

• Section 3: New Section 1299 (Treatment of Certain Partnership Interests)
• Defines applicable partnership interest: Any interest transferred/held for services in an applicable trade or business (regular activities raising/returning capital and investing/developing "specified assets" like securities, commodities, investment real estate, derivatives). Also includes interests funded by applicable loans (non-market loans from the partnership/partners). Excludes outright purchases.
• Holders must report a deemed compensation amount as ordinary income annually: A "specified rate" (long-term interest rate + 9%) times the gap between the interest's share of partners' total "invested capital" (net contributions + income - distributions/losses) and its own invested capital.
• Offsets with an equal long-term capital loss.
• Accelerated inclusion if sold within 10 years.
• Partnerships must report these amounts to IRS and partners.
• Applies to tax years starting after enactment; repeals prior carried interest rule (Section 1061, 3-year holding requirement).

Significant Changes to Existing Law

• Overrides current favorable tax treatment of carried interest (capital gains after holding periods).
• Forces immediate income recognition on transfer (under modified Section 83).
• Introduces ongoing annual ordinary income "deemed compensation" based on unrealized value gaps, not just realizations.
• Expands scope to loans, financial contracts (e.g., profit-sharing derivatives), and non-partnerships treated as partnerships.
• Repeals Section 1061 entirely.

Potential Impacts

• Government Agencies: IRS gains revenue from higher taxes on investment income; increased administrative burden for reporting and regulations (Treasury to issue extensive guidance on valuations, loans, tiers).
• Citizens: Investment managers face higher taxes (ordinary rates up to 37% vs. 20% capital gains), potentially reducing incentives for fund management; may increase costs passed to investors (e.g., pensions, endowments).
• International Relations: Minimal direct impact, but could affect U.S. competitiveness in global fund management.

Main Stakeholders Affected

• Investment professionals (e.g., private equity/hedge fund managers receiving carried interest): Primary targets, facing recharacterized income.
• Partnerships in investment activities (raising capital, trading securities/commodities/real estate): New reporting and calculation requirements.
• Limited partners/investors (e.g., retirement funds): Indirectly affected via potential higher fees or returns.
• IRS/Treasury: Enforcement and rulemaking role.
• General taxpayers: Potential revenue gain for public spending.

Notable Legal, Constitutional, or Political Implications

• Legal: Heavily reliant on Treasury regulations to prevent abuse (e.g., undervaluing assets, tax-indifferent parties); broad anti-avoidance rules for loans, tiers, gifts. Could face challenges on valuation methods or retroactivity (though prospective).
• Constitutional: Standard congressional tax power; no apparent free speech/property rights issues.
• Political: Sponsored by Senate Democrats; targets "loophole" criticized as unfair favoritism for wealthy managers, but opposed by finance industry as discouraging investment.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Sen. Wyden, Ron [D-OR]

Cosponsors (13)

Sen. Whitehouse, Sheldon [D-RI], Sen. King, Angus S., Jr. [I-ME], Sen. Warren, Elizabeth [D-MA], Sen. Sanders, Bernard [I-VT], Sen. Smith, Tina [D-MN], Sen. Luján, Ben Ray [D-NM], Sen. Schatz, Brian [D-HI], Sen. Reed, Jack [D-RI], Sen. Hirono, Mazie K. [D-HI], Sen. Markey, Edward J. [D-MA], Sen. Fetterman, John [D-PA], Sen. Blumenthal, Richard [D-CT], Sen. Van Hollen, Chris [D-MD]

Recent Actions

• 2026-04-16: Read twice and referred to the Committee on Finance.
• 2026-04-16: Introduced in Senate

Bill Versions

• Ending the Carried Interest Loophole Act — issued 2026-04-16 — PDF (18 pages)