H.R. 1091 — Carried Interest Fairness Act of 2025

This section provides the short title, the “Carried Interest Fairness Act of 2025,” and specifies that, unless otherwise stated, all amendments and repeals in the Act apply to the Internal Revenue Code of 1986.

This section revises section 83 of the Internal Revenue Code to treat a partnership interest transferred in connection with the performance of services as having a fair market value equal to the amount the service provider would receive if the partnership sold all of its assets at fair market value and liquidated, reduced by partnership liabilities, and to treat the recipient as having made the section 83(b) election unless the recipient affirmatively opts out under rules similar to those governing that election. (Thus, the recipient generally includes the value of the partnership interest in gross income in the year of transfer rather than when the interest vests.) The amendment applies to partnership interests transferred after the date of enactment.

This section establishes special tax rules for an investment services partnership interest, under which a partner’s net capital gain is treated as ordinary income and net capital loss is treated as ordinary loss, subject to a cap that limits ordinary-loss treatment to the amount of prior gains already recharacterized under the provision. It also requires the ordinary-income and ordinary-loss amounts to be allocated ratably among the underlying capital gain and loss items, excludes dividends allocated to such an interest from qualified dividend income treatment under section 1(h), and denies section 1202 qualified small business stock treatment for gain allocated to such an interest. This section also treats gain on the disposition of an investment services partnership interest as ordinary income and recognized notwithstanding other tax rules, except that transfers by gift or at death are exempted from immediate gain recognition and the interest retains its character in the hands of the transferee. Any amount that would have been ordinary income if the decedent had sold the interest immediately before death is treated as income in respect of a decedent under section 691. Loss on disposition is treated as ordinary loss only to the extent of prior ordinary income recharacterized under the section. This section further permits a taxpayer to elect, for certain contributions of an investment services partnership interest to a partnership in exchange for a partnership interest, to treat the received interest as an investment services partnership interest if the taxpayer makes an irrevocable election and complies with reporting and recordkeeping requirements prescribed by the Secretary. It also requires a partner to recognize gain on a distribution of partnership property with respect to such an interest to the extent the property’s fair market value exceeds its adjusted basis, and treats that gain as ordinary income to the same extent that a corresponding increase in distributive share would be treated as ordinary income under the new section.