US President Donald Trump has proposed a significant tax reform targeting the carried interest tax break, which has historically provided substantial financial benefits to hedge fund managers, according to a report by Nasdaq.com.
The proposal aims to address the imbalance between the tax rates paid by hedge fund executives and ordinary workers.
Hedge fund managers typically earn their compensation through a mix of management fees and performance fees with the latter – the lion’s share of of earnings – currently taxed as capital gains rather than income under current tax laws. As such the performance fee element of earnings is subject to a 23.8% tax rate rather than the higher ordinary income tax rate of 40.8% paid by regular employees.
The new proposal seeks to reclassify carried interest as ordinary income for tax purposes, bringing the tax rate for hedge fund managers in line with those of other high-income professionals.
This reform marks a notable shift from previous policy stances, as both Democratic and Republican administrations have allowed the carried interest tax break to persist despite public opposition. The hedge fund industry has lobbied extensively to protect this tax benefit.
