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IRS Deals Tax Blow To Barclays Currency ETNs,
by Leroy Baker, Tax-News.com, New York
Tuesday, December 11, 2007
Barclays Bank PLC has announced that a US Internal Revenue Service ruling,
issued on December 7, 2007, holds that any financial instrument linked to a
single currency regardless of whether the instrument is privately offered, publicly
offered or traded on an exchange, including an ETN, should be treated like debt
for federal tax purposes.
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.
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