Other Financial Products

Volatility ETNs, foreign futures, precious metals, and swaps.

Volatility ETNs

Volatility exchange-traded notes (ETNs) are structured as “prepaid forward contracts” or as “debt instruments.” Our tax counsel says that an ETN prepaid forward contract is not a security in the eyes of the IRS, whereas ETN debt instruments are. 

Sales of ETN prepaid forward contracts use the realization method on sales. Long-term capital gains rates apply if held for 12 months or longer. Because it’s not a security, ETN prepaid forward contracts (i.e., VXX) are not subject to wash-sale loss adjustments or Section 475 (if elected). ETN debt instruments (i.e., UGAZ) are securities subject to wash-sale losses and Section 475 (if elected). Check the tax section of the ETN prospectus.

Foreign futures

By default, futures contracts listed on international exchanges are not covered by Section 1256. If the international exchange wants Section 1256 tax treatment, it must obtain an IRS Revenue Ruling. Only a handful of international futures exchanges have Section 1256 treatment: Eurex, LIFFE, ICE Futures Europe, and ICE Futures Canada. Foreign futures are otherwise ST or LT capital gains. 

Precious metals

Physical precious metals are a particular class of capital assets called collectibles. If you hold collectibles for 12 months before the sale, you must use the capital gains tax rate applicable to collectibles, capped at 28%. That rate is higher than the top long-term capital gains rate of 20% (2023 and 2024). The short-term capital gains rate applies if you hold collectibles for 12 months or less. Precious metals are not securities, so wash-sale loss adjustments and Section 475 do not apply. Please read our blog post: Tax Treatment for Precious Metals, https://tinyurl.com/gtt-precious.

Swap contracts

The Dodd-Frank financial regulation law promised to clear private swap transactions on exchanges to protect the markets from another swap-induced financial meltdown. Remember those credit default swaps with insufficient margins? When Congress enacted Dodd-Frank in 2010, traders hoped that clearing on futures exchanges would allow Section 1256 tax treatment. They were wrong: Congress and the IRS immediately communicated that Section 1256 would not apply to swap transactions, and they confirmed ordinary gain or loss treatment. 

If you would like more information, you can see Green’sTraderTax Guide Chapter 3, Tax Treatment of Financial Products.