The Carried Interest Tax Loophole is a provision in the U.S. tax code that allows investment managers—particularly in private equity, hedge funds, and venture capital—to classify a portion of their performance-based compensation (known as 'carried interest') as long-term capital gains rather than ordinary income. This enables managers to pay a maximum tax rate of 20% (plus a 3.8% net investment income tax, totaling 23.8%) on these profits, compared to ordinary income rates that can reach 37% or higher. Originating from interpretations of partnership tax rules, the loophole has been criticized as a subsidy for wealthy financiers and disproportionately benefits firms like Blackstone Group, which has lobbied to preserve it. The policy allows managers to receive up to 20% of a fund's profits as performance-based compensation without immediate taxation upon receipt, deferring taxes until profits are realized and applying the lower capital gains rate if assets are held for at least three years (as extended by the 2017 Tax Cuts and Jobs Act).

Efforts to close the loophole have persisted for decades, with multiple legislative proposals introduced in Congress. Recent bills include the Carried Interest Fairness Act, introduced in 2023 or later by Reps. Marie Gluesenkamp Perez (WA-03) and Don Beyer (VA-08), which aims to tax carried interest as ordinary income, potentially raising $6.5 billion over 10 years according to Treasury estimates. Another proposal, the Ending the Carried Interest Loophole Act, treats carried interest as a deemed compensation amount taxed annually at ordinary rates, avoiding disruptions to partnership rules while addressing income deferral. Internationally, similar reforms are underway, such as the UK's draft legislation effective from 2026, which subjects carried interest to income tax and National Insurance Contributions at effective rates up to 34.075% for high earners. Critics argue the loophole exacerbates income inequality and contributes to federal deficits, while opponents, including industry groups, claim closing it could harm innovation, jobs, and housing investments.

The loophole remains a focal point in debates over tax fairness, with endorsements from figures like President Trump in discussions to revive closure efforts, though past attempts have failed due to lobbying by affected industries. It influences networks of financial power, as private equity executives retain lower effective tax rates than other professionals, perpetuating wealth concentration among top earners.