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Senate Democrats dropped a proposed tax increase on carried interest from the Inflation Reduction Act, but the issue isn’t going away—and it isn’t simple. You can tell a story that carried interest should be taxed as ordinary income, as the earlier version of the bill had proposed, but only if you ignore the subtleties.
If you work, you earn a wage, which is taxed as ordinary income—almost 40% for high-income individuals. If you buy a stock and it goes up, you are taxed at capital-gains rates, usually 20%. Investors are rewarded by the tax code with lower rates because creating new innovations requires risk.
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