“US Tax Aspects of Equity Derivatives,” Tax Management Financial Products Report, November 1997 TMFPR 1997 Equity Derivatives
An equity derivative is an instrument that is not itself a share of stock, but whose value is derived from the value of one or more shares of stock. The varieties of such contracts have proliferated significantly in the 1990s so that the market place not only offers the traditional convertibles and warrants but also stock index products, unbundled stock units, swaps, and numerous hybrid products.
This article address three basic types of equity derivatives: options, forwards/futures, and swaps. Each is examined from the perspective of several fundamental tax questions: timing (when is income/loss taken into account), character (capital or ordinary income/loss), source (is the income/loss) sourced within or outside the U.S), withholding, and tax ownership.