ETNs Under the Microscope


Currency ETNs are Debt- Other ETNs Open for Comment

Friday, December 7, 2007 the IRS issued Revenue Ruling 2008-1 and Notice 2008-2


Revenue Ruling 2008-1 declares ETNs that are based on a foreign currency to be debt for tax purposes. This result is “not affected if the instrument is (i) privately offered, (ii) publicly offered, or (iii) traded on an exchange.” Therefore ETN holders should take into account each year Original Issue Discount on currency ETNs.


Notice 2008-2 requests “comments from the public with respect to issues that arise with certain financial transactions frequently referred to in the marketplace as prepaid forward contracts (or in certain circumstances as exchange traded notes.)”. In particular the IRS and Treasury Department are considering whether holders of ETNs (or other prepaid contracts) should be required to “accrue income/expense during the term of the transaction”. This would cover contracts not treated as debt (such as the treatment on Currency ETNs).


Comments should address:



This is not a comprehensive list of the requested possible comments but is illustrative of the thinking behind the Notice. Certainly it is clear that any rules will apply not only to ETNs but also to OTC issued prepaid contracts. It is not clear that any “fix” will not be applied retroactively, but historically any change in law has been applied only prospectively. The issue will hinge on whether what is decided is current law applied (such as with the currency ETNs) or new law that should be applied only prospectively to buyers after the rules are promulgated.


Comments are due by May 13, 2008.






The Magic of ETNs