Treasury’s Green Book Proposals Could Affect Asset Management Industry

On March 11, 2024, the Treasury Department released its General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, commonly referred to as the “Green Book.” The Green Book summarizes the Biden Administration’s tax proposals and changes contained in its fiscal year 2025 budget.

Several Green Book proposals are particularly relevant for managers of hedge funds and private equity funds, including proposals that would change:

  • The taxation of carried interest.
  • Individual income tax rates.
  • The net investment income tax.
  • Capital gains and qualified dividend income.
  • The limitation on losses for noncorporate taxpayers.

This Alert includes additional details on these Green Book proposals and highlights several other proposals with potential impact on the asset management industry. 

Tax Carried (Profits) Interests as Ordinary Income

Following enactment of the Tax Cuts and Jobs Act in 2017, allocations of long-term capital gain representing so-called “carried interests” have been subject to recharacterization based on the holding period of property generating the gain. To the extent the property generating gain was held for three years or less, the carried interest allocations would be recharacterized as short-term capital gain subject to ordinary income tax rates. 

Consistent with the administration’s fiscal year 2024 budget proposal, the administration proposes treating certain carried interest allocations as ordinary. Specifically, under the proposal, a partner’s share of income from an “investment services partnership interest” (ISPI) would be taxed as ordinary income, provided the partner’s taxable income from all sources exceeds $400,000. Additionally, to the extent income allocated with respect to an ISPI is taxed as ordinary income, the income would also be subject to self-employment taxation. 

For purposes of these rules, an ISPI is a profits interest in an investment partnership that is held by a person who provides services to the partnership. A partnership is considered an investment partnership if (1) substantially all of its assets are investment-type assets such as securities, real estate, interests in partnerships, commodities, cash or cash equivalents, or derivative contracts with respect to these assets; and (2) over half of the partnership’s contributed capital is from partners holding the interest as an investment rather than in connection with a trade or business. 

The proposal would be effective for taxable years beginning after December 31, 2024.

Individual Income Tax Rate

The administration proposes increasing the top marginal individual income tax rate from 37% to 39.6%. For taxable year 2024, the rate would apply to taxable income over $450,000 for married individuals filing jointly ($225,000 for married individuals filing separately), $425,000 for head of household filers, and $400,000 for single filers. 

The proposal would be effective for taxable years beginning after December 31, 2023. 

The proposal to increase the top marginal individual income rate merely accelerates the increase of the top individual tax rate to 39.6% that is currently scheduled to occur beginning in 2026, which is after most of the 2017 Tax Cuts and Jobs Act (TCJA) provisions are set to expire. However, this proposal also would lower the taxable income bracket subject to the top marginal income tax rate. As a result, the proposal would impose the top marginal tax rate on filers currently below the existing top marginal income tax rate of 37%. Thus, in 2024 the top marginal tax rate is 37% for joint filers with more than $731,200 of taxable income ($609,350 for single filers and heads of household, $365,600 for married filing separately). By comparison, the proposed 39.6% tax rate would apply to taxable income over $450,000 for married individuals filing jointly.

Net Investment Income Tax (NIIT)

As seen in last year’s budget, the administration proposes to expand the net investment income tax (NIIT) base to ensure that all pass-through business income of high-income taxpayers is subject to either the NIIT or Self-Employment Contributions Act (SECA) tax. Under the proposal, a taxpayer would determine “potential NIIT income” by combining income in trades or businesses in which the taxpayer materially participates and that is otherwise not subject to NIIT or SECA under current law. The additional income that would be subject to the NIIT would be a specified percentage of potential NIIT income. The specified percentage would start at zero and increase linearly to 100 as adjusted gross income rose from $400,000 to $500,000 ($200,000 to $250,000 for married taxpayers filing separately). These threshold amounts would not be indexed for inflation. 

The administration also proposes to increase the NIIT rate and the additional Medicare tax rate by 1.2 percentage points for taxpayers with more than $400,000 of earnings, which would bring the total tax rate from 3.8% to 5%. This threshold would be indexed for inflation. 

Both proposals would be effective for taxable years beginning after December 31, 2023.

Capital Gain and Qualified Dividend Income

Long-term capital gains and qualified dividend income of taxpayers would be taxed at ordinary income tax rates to the extent the taxpayer’s taxable income exceeds $1 million ($500,000 for married individuals filing separately). The threshold would be indexed for inflation after 2024. 

The proposal would be effective for gain required to be recognized and for dividends received on or after the date of enactment. 

If the proposal for raising the ordinary income tax rate to 39.6 % becomes law, then the maximum tax rate on capital gains would effectively be 44.6% (39.6% plus NIIT rate of 5%).

Strengthen Limitation on Losses for Noncorporate Taxpayers

Section 461(l) imposes a limitation on the ability of noncorporate taxpayers to use business losses to offset other sources of income. Indexed annually for inflation, the annual limitation for 2024 is $610,000 for married individuals filing a joint return and $305,000 for all other taxpayers. Any net business losses in excess of this limitation constitute an excess business loss that is carried forward to subsequent taxable years subject to the rules applicable to net operating losses. These limitations are applied after basis limitations (for pass-through entities), at-risk limitations, and limitations on losses from passive activities. 

After being extended twice, under current law, these limitations would cease to apply for taxable years beginning after December 31, 2028. 

The proposal, which would be effective for taxable years beginning after December 31, 2024, would make Section 461(l) permanent and would eliminate the provision that subjects excess business losses from a prior taxable year to the rules applicable to net operating losses in subsequent years. Thus, the Section 461(l) limitations would apply to the initial year of the excess business loss and to any subsequent taxable years to which such losses are carried.

Other Relevant Proposals

The Green Book includes several other relevant proposals for the asset management industry:

  • Imposing a minimum tax of 25% on taxable income, inclusive of unrealized capital gains, for taxpayers with a net worth in excess of $100 million.
  • Taxing unrealized gains on certain transfers of appreciated property.
  • Treating substitute payments on derivatives covering publicly traded partnerships as Effectively Connected Income (ECI).
  • Allowing retroactive Qualified Electing Fund (QEF) elections for investments in Passive Foreign Investment Companies (PFICs) as long as it would not prejudice the government.
  • Expanding IRS summons authority for large partnerships, which could lead to longer statute of limitations periods for assessments.


Given the currently divided government, the future of President Biden’s FY 2025 tax proposals is highly uncertain. As the 2024 election nears, the future of the current administration’s tax policy wish list may become clearer, depending on the makeup of the White House, the House, and the Senate in 2025.