Unhappy with the IRS' Currency ETN Tax Ruling, Happy with Its Clarity

The new IRS ruling on taxation for currency ETNs strikes me as hugely important, and not just for ETNs.

As I say in my article on the ruling, what's interesting is that the IRS has made a blanket ruling on an asset class—currencies—irrespective of product structure. Going forth, all currency investments will be treated as debt, no matter what kind of product wrapper they come in.

I'm not a tax attorney, but that strikes me as a big leap forward. Is there any other asset class where all product structures receive a uniform tax treatment? What if gold and gold futures were taxed equally? Stocks and stock options?

What if those taxes were applied (or not applied) equally to all investors?

Investors don't pay enough attention to after-tax returns, in part because everyone is afraid to discuss tax issues in plain English. As the prospectuses say, "Consult your tax advisor."

That's hogwash. My local accountant is not an expert on things like ETNs; the ETN issuers are. And while each person's situation is different, the product issuers could at least speak in plain English about what the impact is for most investors. When the currency ETNs were issued, it took me two days and a series of phone calls to figure out how they were taxed. It was a similar effort to figure out how the currency ETFs were taxed.

And despite the time passed, very few people understood the issue until Monday. As yourself: Did you know, Monday, that all gains based on currency movements were taxed as ordinary income in the CurrencyShare ETFs? I bet three-quarters of the ETF holders have no idea.

I'm not happy that the IRS decided to increase the tax burden on currency investments, but I am happy for the clarity of their ruling.

Now if they could only shrink the personal income tax code down from the current 5,000,000 pages ...

Written by Matthew Hougan

Comments

[Index Maven]

At last count the Internal Revenue Code was 4,766 pages. However, the portion most people need concern themselves with is only about 2800 pages - if that makes you feel better. The IRS ruling on currency ETNs (and other forward contracts on currency) is actually very narrow. I would not say it applies to the entire asset class. For instance, it's not clear it would apply to a basket of currencies since the ruling is based on a single currency. It certainly would not apply to an outperformance structure ($/pound vs. $/yen, for example). I view the ruling as very particular and narrow -- currency has long had its own special rules in the tax code (Section 988) and so it's not surprising the ruling is written the way it is.