“Taxation of Credit Derivatives,” Derivatives and Financial Instruments, IBFD, July/August 1999 DFI-1999-7 CDS
Broadly defined, a credit derivative is a contract which requires one party to make payments or perform certain actions based on a credit event or the credit performance of a specified credit-sensitive instrument or instruments. A credit derivative can take the form of a swap, an option, a note, or a hybrid product.
This article will outline the major US federal income tax consideration in analyzing credit derivatives, focussing on the taxation of total return swaps, and credit put options. Before turning to the tax issues relating to these products, a brief comparison of credit derivatives and traditional credit risk management tools will be discussed.