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How are iPath ETNs treated for U.S. federal income tax purposes? |
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What makes iPath ETNs an attractive investment option? |
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Is there an IRS or court ruling that governs the U.S. tax treatment of iPath ETNs? |
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What is the ruling on the U.S. tax treatment of iPath ETNs? |
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What does it mean for iPath single currency ETN investors? |
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Do iPath single currency ETN investors need to submit a form to the IRS requesting certain tax treatment? |
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What are the benefits of investing in iPath single currency ETNs? |
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What is Barclays’ reaction to the ruling on the U.S tax treatment of iPath ETNs? |
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What is the current tax status on equity, commodity and certain alternatives ETNs? |
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What is Barclays’ position about the tax status of the equity, commodity and certain alternatives ETNs? |
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All iPath ETNs, except single currency ETNs, should be treated for all tax purposes as prepaid contracts with respect to the relevant index. If such iPath ETNs are so treated, investors should recognize gain or loss upon the sale, redemption or maturity of their iPath ETNs in an amount equal to the difference between the amount they receive at such time and their cost basis in the securities. Such gain or loss should generally be capital gain or loss, except with respect to those iPath ETNs for which you agree to treat such gain or loss as ordinary, as detailed in the chart below.
The following table summarizes certain U.S. federal tax consequences that holders of iPath ETNs and Barclays agree to be subject to by purchasing an iPath ETN. These tax consequences, however, are not certain and alternative treatments are possible. Please see the applicable prospectus for a more complete discussion of the primary tax treatment and alternative tax characterizations that are possible with respect to each iPath ETN.
The following table summarizes certain U.S. federal tax consequences that holders of iPath ETNs and Barclays agree to be subject to by purchasing an iPath ETN. These tax consequences, however, are not certain and alternative treatments are possible. Please see the applicable prospectus for a more complete discussion of the primary tax treatment and alternative tax characterizations that are possible with respect to each iPath ETN.
| TYPE | TREATMENT AT MATURITY |
RECOGNITION OF CURRENT INCOME | TICKERS |
|---|---|---|---|
| Commodities, Buy Write, Equity, Alternatives |
Capital gains | No | DJP, GSP, JJA, JJE, JJG, JJS, JJM, JJP, COW, GAZ, OIL, NIB, JO, BAL, SGG, JJU, JJC, LD, JJN, JJT, PGM, BWV, INP, GRN, VXX, VXZ |
| Carry Trade | Ordinary Income | No | ICI |
| Single Currency | Ordinary Income | Yes | ERO, GBB, JYN |
Unlike mutual funds that may be required to make taxable distributions to shareholders, the iPath ETNs currently available will not make taxable distributions. This enables investors to control the timing of taxable events related to their investment in iPath ETNs. However, the IRS and U.S. Treasury are actively considering the tax treatment of instruments such as iPath ETNs, which could change.
Yes, for iPath single currency ETNs only.
Revenue ruling 2008-1, issued on December 7, 2007, holds that certain financial instruments linked directly to the value of a foreign currency—regardless of whether the instrument is privately offered, publicly offered or traded on an exchange—should be treated like debt for federal tax purposes. Revenue Ruling 2008-1 extends to iPath single currency Exchange Traded Notes (ETNs).
This means that any interest accrued (net of fees) during the life of the note is taxable to investors, even though the interest is reinvested and not paid out until the holder sells the ETN or the note matures. It also means that a gain or loss from the sale or redemption of the notes will be ordinary and investors will not be able to elect capital gain treatment.
Do iPath single currency ETN investors need to submit a form to the IRS requesting certain tax treatment?
No, it is not necessary to elect any specific treatment since the IRS has ruled how financial instruments linked directly to the value of a foreign currency should be treated from a tax perspective. Most custodians will provide Form 1099 OID for annual tax reporting purposes.
Institutional and individual investors increasingly recognize that
currency exposure may constitute a separate asset class to provide portfolio diversification and add potential portfolio returns. The iPath single currency ETNs provide simple, transparent and cost-effective access to three significant exchange rates.
The ruling provides investors clarity on the tax treatment of certain financial instruments linked directly to the value of a foreign currency—regardless of whether the instrument is privately offered, publicly offered, or traded on an exchange. In addition, because they make no distributions, holders benefit from daily compounding.
The revenue ruling does not apply to ETNs that are linked to equities, commodities or certain alternatives. The IRS also issued notice 2008-2 asking for comments by May 13, 2008 on the appropriate tax treatment of instruments such as the equity and commodity ETNs.
What is Barclays’ position about the tax status of the equity, commodity and certain alternatives ETNs?
Barclays is aligned with the Securities Industry and Financial Markets Association (SIFMA). We believe that the tax treatment of investment products should be driven by the product’s tax attributes. Mutual funds and ETNs are taxed differently because they are fundamentally different products. Investors who buy shares in a mutual fund own the underlying securities and receive dividend income from those securities annually which is taxable. ETN investors do not own underlying securities and receive no dividends while holding the ETN.