When Republicans passed Donald Trump’s “big, beautiful” tax bill on Thursday, they included provisions to partially offset the costs, including significant cuts to Medicaid and food stamps. One area lawmakers didn’t touch: the so-called carried interest loophole that offers beneficial tax treatment to wealthy private equity, venture capital and hedge fund managers.
The carried interest loophole refers to a provision in the U.S. tax code that allows investment fund managers, like private equity executives, to pay a lower tax rate than normal, everyday workers. Private equity firms typically raise outside capital from investors like pension funds, insurance companies and high net worth individuals. They use this money, called the fund, to invest in companies, frequently taking control of these businesses. PE executives usually receive a share of the profits—the carry—for managing investments.
When a PE fund sells an asset, likely a portfolio company, at a higher price than what they bought, PE execs get carry. If the asset is sold after three years, the profit is taxed at a long-term capital gains rate of 20%. If they sell the business before the three years, the carry is taxed at a short term capital gains rate of 37%.
The problem is that the 20% tax rate is lower than what many everyday U.S. workers pay. A couple filing jointly, making under $206,700, faces a 22% tax rate, while a single person who makes under $197,300 is taxed at 24%, according to 2025 tax brackets. Meanwhile, many finance executives’ hefty salaries place them in the top 35% or 37% tax brackets—so the 20% carried interest loophole represents both a special perk for fund managers, and foregone tax revenue for the federal government.
Carried interest has been a perennial hot button issue. For roughly the past 20 years, lawmakers, including President Barack Obama, Sen. Elizabeth Warren (D-Mass.) and even Trump himself, have called for carried interest to be changed so that it is be treated as ordinary income. Several bills have been introduced, including one from Sen. Tammy Baldwin (D-Wis.), who in February wanted to tax carried interest at the same rate that ordinary workers pay on their income.
Trump, when he first ran for president in 2016, vowed to change the carried interest loophole but didn’t follow through. Instead, his tax bill from 2017, the Tax Cuts and Jobs Act, made it harder to qualify for long-term capital gains rates of 20%. The 2017 law changed the holding period from one year to three years, which means PE firms must own an asset for three years before they can sell and have the profit taxed at the long-term capital gains rate of 20%. Trump also spoke to Republican lawmakers about changing carried interest in February but took no action.
On Thursday, the Trump-endored tax bill passed by the House doesn’t mention carried interest. This means that the changes imposed by Trump’s 2017 Tax Cuts and Jobs Act, which made it harder to secure long-term capital gains, remain in place.
“The President’s 2017 law struck the right balance on carried interest, and we’re pleased that the new legislation will encourage more long-term investment across America,” said the American Investment Council, lobbyists for the PE industry, in a statement to Fortune Thursday.
“What came out of the House this morning doesn’t affect carried interest. The current carried interest will stay,” added Mark Leeds, a tax partner at law firm Pillsbury Winthrop Shaw Pittman.
It’s still too early for private equity to claim victory. The tax bill will now head to the Senate, which will likely make modifications before the legislation is handed to President Trump to sign. “It’s possible the Senate could still make changes to carried interest,” Leeds said.