The "Carried Interest Fairness Act of 2025" aims to significantly alter the tax treatment of income earned by partners providing investment management services, commonly known as carried interest. This legislation reclassifies certain capital gains from these interests as ordinary income, ensuring that compensation for services is taxed at higher ordinary income rates rather than preferential capital gains rates. It also ensures this income is subject to self-employment taxes, aligning its treatment with other forms of service income. A central provision of the bill introduces a new Section 710 to the Internal Revenue Code. This section mandates that any net capital gain derived from an investment services partnership interest will be treated as ordinary income. Similarly, any gain realized from the disposition of such an interest will also be recharacterized as ordinary income, with corresponding rules for losses. This recharacterization applies broadly to income generated through investment management activities. The legislation broadly defines an investment services partnership interest as an interest in an investment partnership acquired or held in connection with providing specific services like advising, managing, or arranging financing for assets. An investment partnership is characterized by having substantially all assets as "specified assets" (e.g., securities, real estate, commodities) and less than 75 percent of its capital originating from qualified capital interests. This definition is designed to encompass a wide array of private equity, hedge fund, and venture capital structures. The bill includes an important exception for qualified capital interests , allowing capital gains treatment for the portion of an interest attributable to a partner's actual capital contributions. This exception applies provided that allocations to such capital interests are made similarly to those of non-service partners. The legislation also extends ordinary income treatment to other "disqualified interests," such as equity or convertible debt, in investment entities or special purpose acquisition companies (SPACs) if their value is tied to asset performance and investment management services are provided. To further align tax treatment, the bill amends existing law to include income and loss from investment services partnership interests in the calculation of net earnings from self-employment , making it subject to Social Security and Medicare taxes. Additionally, the legislation imposes a heightened 40 percent penalty for underpayments resulting from attempts to avoid these new rules, with stricter conditions for claiming a reasonable cause exception. The bill also repeals current Section 1061 of the Internal Revenue Code, which previously addressed carried interest with a three-year holding period rule, and generally applies to taxable years ending after its enactment.