Last week, we discussed how the elimination of qualified small business stock (QSBS) is being floated as a way to help pay for tax reform. This week, President Trump added carried interest to that list. Crypto is also gaining momentum, with a flurry of activity on the Hill and at the SEC.
Let's dive in.
This is getting taxing
In a meeting with House Republican leaders, Trump expressed support for ending the favorable tax treatment for carried interest— the share of a private fund’s investment profits that a fund manager receives as compensation—as one of his tax priorities.
Quick catch-up detour: Most fund managers operate on a “two and twenty” model or similar fee structure. They earn a 2% management fee based on assets under management (AUM) and then a 20% incentive fee—the carried interest, or carry—based on returns. Management fees are taxed at ordinary income rates, but because carry is derived from investment returns, it is currently taxed at the long-term capital gains rate if held for three years. Outright elimination of this treatment would push the tax rate of the carry to ordinary income levels, a substantial increase—though the administration did not provide specific details on its position.
Why it matters: Taxing carried interest as long-term capital gains rate rather than ordinary income would have a substantial impact on what fund managers take home (and keep). The industry argues favorable treatment of carried interest drives capital into the ecosystem. It does. And it aligns incentives between the manager, their investors, and their investments.
But it is even more consequential for smaller and emerging managers.
Our take: For larger firms, a 2% management fee can be substantial—it can pay for research, deal sourcing and diligence, legal fees, salaries, and much more. But if you are an emerging or smaller manager, that 2% may barely cover administrative costs, much less salary. These managers are taking a risk to start and build a fund. Their upside comes not from the 2% management fee, but from helping their investments—startups and growth-stage companies—succeed, and delivering returns to their investors (LPs). That is the carry, and that is what we want to incentivize. Emerging managers often are the ones building outside the main tech hubs, supporting young local businesses, and backing talented entrepreneurs who don’t have access to the usual networks.
We want that investment in this innovation ecosystem. It’s good for the country. Carried interest tax treatment incentivizes it.
(steps off soap box)
So what is going to happen?
Politics: Both parties demagogue this issue each election cycle. But no matter who wins, financial interests seemingly always carry the day (pun intended). This was largely true during the 2017 tax debate: Trump proposed cutting the favorable treatment during the campaign but settled for extending the holding period to qualify for the treatment.
Most in industry hoped that carried interest would remain under the radar—and felt more confident after the Republican sweep. Some (*cough* Carta Policy *cough*) warned that provisions like carried interest (and QSBS) could still be in danger given the need for offsets. To be fair, we thought Democrats would have used these issues to drive a wedge between the MAGA-populist wing of the party and the affluent tech and financial elite. Turns out, President Trump may push the conflict early to force resolution.
What to watch: Tax reform needs almost every Republican vote. Here are some signals to watch:
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Profiles in courage: Keep an eye on whether any members make preserving carried interest their fight, like former Sen. Kyrsten Sinema, who saved carried interest when Democrats had unified control.
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MAGA: Will eliminating carried interest gain traction with the populist wing? If it does, President Trump likely keeps the drumbeat up.
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The inner circle: Some of Trump’s strongest supporters (and cabinet leaders) have benefited from carried interest. But not all beneficiaries are in favor of maintaining the current tax treatment. If that cohort broadens, especially with major voices, it could weaken the industry’s long-held position and potentially end the favorable tax treatment of carried interest.
What to do: Engage. Carta has launched the Innovator Alliance—a growing organization of partners focused on driving policies to protect and bolster the innovation ecosystem. Our priorities include preserving QSBS and carried interest, restoring full R&D expensing, creating a safe harbor for net operating losses, and aligning the taxation of equity comp to the time of sale. If you are interested in getting involved or getting regular updates, contact us.
Crypto hits the fast track
Crypto policy took center stage in Washington this week, with a flurry of activity designed to send a clear message on digital assets: Policymakers will craft a path for digital assets to flourish.
At his first official event as crypto czar, David Sacks heralded a new “golden age” for digital assets and laid out the administration's policy objective for digital assets: Establish a clear regulatory framework for digital assets and ensure the U.S. remains at the forefront of innovation. There was more: Congressional leaders formed a bicameral congressional working group populated by members from relevant committees to spearhead legislative efforts; lawmakers introduced stablecoin legislation and criticized efforts to debank the industry; and the SEC’s crypto task force hit the ground running.
Let’s zoom in on stablecoins and the SEC.
Stablecoins: Sacks made the national economic case for stablecoins, saying they would boost the U.S. dollar’s status as the world’s reserve currency, create greater demand for U.S. Treasuries, and lower long-term interest rates. Legislative efforts will start with defining a stablecoin regulatory framework.
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Senate: Sens. Bill Hagerty and Kirsten Gillibrand introduced the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act to create a clear regulatory framework for payment stablecoins. Chairman Tim Scott wants to advance a stablecoin bill in the first 100 days.
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House: The chairmen of the House Financial Services Committee and Digital Asset Subcommittee circulated a similar proposal, the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act, which will be a topic of discussion at a digital asset hearing next week.
Both bills are based on legislation that former HFSC Chair Patrick McHenry and Ranking Member Maxine Waters worked on in the last Congress. The newer iterations would give the Office of the Comptroller of the Currency (OCC) authority to supervise nonbank stablecoin issuers; the McHenry bill would have granted oversight responsibility to the Federal Reserve.
Our take: Stablecoins have always been considered the lowest hanging fruit, but even in the new pro-crypto atmosphere, enacting a stablecoin framework is far from a done deal. Support from Democrats like Gillibrand (who also heads the Senate campaign arm) will help improve the odds, but advancing any legislation in the current political environment and with small voting margins will be challenging.
Meanwhile at the SEC, the newly formed Crypto Task Force hit the ground running, ushering in a sea change as to how the agency approaches digital assets and shifting away from the enforcement-centric strategy to regulate the crypto industry pursued by the former SEC Chair. SEC Commissioner Hester Peirce outlined a non-exhaustive list of crypto-focused items the task force will pursue to create a regulatory framework for digital assets that provides clarity and promotes innovation, while protecting investors and market integrity.
Peirce emphasized the need to work with the industry on these measures in a constructive and transparent manner, while also managing expectations with respect to the speed at which these actions can happen. The task force will have to navigate the fragmented approach the agency has taken to crypto regulation over the past decade, including “disentagling” pending litigation. Peirce asked for patience as staff works through these issues, as well as an expected influx in requests.
[Side note: Such an influx could slow down rulemaking efforts and regulatory approvals in non-crypto areas as well, as many of the agency’s finite resources may be tapped to assist.]
Engagement: As our readers know by now, engagement matters. The task force provides an incredible opportunity for the industry to engage and help shape the development of crypto regulation with leadership that is open to new approaches and ideas. Much of the near-term action on crypto regulation will happen at the SEC, where the agency can use exemptive authority and other tools to allow crypto companies to operate while Congress charts a path on a regulatory framework. The task force has launched a webpage and email for market participants to offer input and suggestions, including through meetings and no-action relief requests.
News to know
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SEC begins ushering in a new age of Wall Street enforcement. The agency scaled down its crypto enforcement arm and will now need commission approval to formally announce probes.
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Senate Republicans release budget blueprint ahead of Wednesday markup. The Senate is moving ahead on a two-bill reconciliation strategy as the House struggles to reach consensus.
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Rohit Chopra out, Scott Bessent in (temporarily) at the CFPB. Bessent has halted CFPB workstreams, though work on pending litigation continues (for now).
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Trump pauses tariffs on Mexico and Canada, but not China. Trump agreed to a 30-day pause in return for concessions on border and crime enforcement from our neighboring allies.
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