Carried Interest Fairness Act of 2025

Recharacterization of Gains: For certain investment services partnership interests, net capital gains would be treated as ordinary income (Section 3(a)(1)(A)).

Recharacterization of Losses: Net capital losses for these specific interests could be treated as ordinary losses, subject to certain limitations (Section 3(a)(1)(B)).

Treatment of Dispositions: Any gain realized on the disposition of an investment services partnership interest would be treated as ordinary income (Section 3(b)(1)(A)).

Tax Treatment of Distributions: Gains recognized from a distribution of partnership property related to an investment services partnership interest would be treated as ordinary income (Section 3(b)(4)(B)).

Modification of Partnership Interest Valuation: When a partnership interest is transferred in connection with providing services, its fair market value is treated as the amount the partner would receive if the partnership sold all assets and distributed proceeds in liquidation (Section 2(a)(A)).

Dividend Treatment: Dividends allocated to an investment services partnership interest will not be treated as qualified dividend income (Section 3(a)(5)).

Small Business Stock Restrictions: The rule regarding qualified small business stock would not apply to any gain from the sale or exchange of such stock allocated to an investment services partnership interest (Section 3(a)(6)).

Increased Penalties: An increased penalty of 40 percent may apply to underpayments related to the avoidance of these sections (Section 3(d)(2)(A)).

Strict Reasonable Cause Standards: The "reasonable cause" exception for certain underpayments is modified to require that the taxpayer has adequate disclosure, substantial authority, and a reasonable belief that the treatment was more likely than not the proper treatment (Section 3(d)(3)(A)).