This means that any interest is taxable to investors, even though the interest is reinvested and not paid out until the holder sells any such financial instrument, including an ETN, or the contract matures. It also means that gain or loss on sale or redemption will generally be ordinary, and investors will not be able to elect capital gain treatment.

The Revenue Ruling does not apply to ETNs that are linked to equities or commodities. The IRS also issued Notice 2008-2 asking for comments on the appropriate tax treatment of instruments described as prepaid forward contracts, which is how investors currently treat the equity and commodity ETNs for tax purposes.

The ruling provides guidance to the tax treatment of three Barclays 'iPath' currency ETNs - the iPath EUR/USD Exchange Rate ETN, the iPath GBP/USD Exchange Rate ETN, and the iPath JPY/USD Exchange Rate ETN.

Launched in May 2007, they are designed specifically to offer exposure to a single currency exchange rate relative to the US dollar. The products would be considered debt for federal tax purposes, even though the holder's initial investment and repayment are made in US dollars, and the holder may get back fewer US dollars than it invested.

"Ruling 2008-1 provides taxable investors clarity on the tax treatment of foreign currency exchange traded notes," announced Philippe El-Asmar, Managing Director, Head of Investor Solutions, Americas, at Barclays Capital. He continued: "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 Currency ETNs provide simple, transparent and cost-effective access to three significant exchange rates."

The iPath Currency ETNs are senior, unsecured, unsubordinated debt securities linked to the performance of an exchange rate and issued by Barclays Bank PLC.

As an example, the return on the iPath GBP/USD Exchange Rate ETN is linked to the performance of the British pound/US dollar exchange rate. The GBP/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the British pound and the US dollar. When the British pound appreciates relative to the US dollar, the GBP/USD exchange rate (and the value of iPath GBP/USD ETN) increases; when the British pound depreciates relative to the US dollar, the GBP/USD exchange rate (and the value of iPath GBP/USD ETN) decreases.

Barclays said that these securities are designed to provide investors with convenient access to the returns of market benchmarks.