House Ways and Means Committee Chairman Kevin Brady told CNBC that he plans to add on Monday an increase to the holding period on carried interest contained in the Republican tax bill, effectively closing a loophole that's been exploited by hedge funds by making it less profitable to exercise.
Brady said on "Squawk Box" that the new holding period will help ensure the rules encourages "long-term, traditional real estate partnerships."
He said the change also would seek to benefit "venture capitalists that are long-term as well," ahead of what's expected to be the beginning of revisions to the GOP tax reform bill to ease some concerns of holdout lawmakers.
Monday evening, Brady introduced his proposed amendment which extended the holding period to three years. That figure is up from the proposed two-year holding period he had given CNBC earlier in the day.
Carried interest is a rule in the tax code that lets the managers of some types of private investment funds — hedge funds, private equity, venture capital, real estate and other types of vehicles — pay a lower rate than most individuals. Carried interest has been U.S. law for more than 50 years as an incentive for long-term investment.
Here's how hedge funds have used carried interest in the shorter term: Usually they charge 20 percent of gains in their funds in any given year on top of a 2 percent annual management fee they get, regardless of performance. For investments held for more than one year, profit is taxed at the lower capital gains rate of 23.8 percent, not the ordinary income rate of 39.6 percent. Profitable investments held less than one year are short-term gains taxed as ordinary income.
Under the proposed change in the GOP reform package, hedge funds would still be able to take advantage of the carried interest rule as long as they adhere to the holding periods, Brady said.
House Republicans unveiled their tax plan last week. The current bill would lower personal and corporate tax rates as well as seek to simplify the U.S. tax code.
House Speaker Paul Ryan said on Sunday that he expects the broad outlines of the bill to remain the same. Republicans aim to pass their tax reform legislation by Thanksgiving.
— CNBC's Liz Moyer and Reuters contributed to this report.