“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.

“US Taxation of Foreign Currency Futures, Options and Forwards,”Tax Management Financial Products Report, August 1997 TMFPR 1997 FX

The globalization of the world economy has brought to the fore the importance of foreign currency derivatives. Corporate treasury departments use them to manage overseas investments, sales, and purchases. Investment managers use them to shield against, or increase, currency exposure in their portfolios. Financial product developers include them when tailoring securities transactions to meet the needs of specific multinational clients. Recently, with the instability in the Asian markets, the importance of a sound currency hedging (or speculation!) policy has become increasingly apparent, and we should expect to see continued growth in the use of currency derivatives both on exchanges and over the counter.

One factor that parties with a U.S presence should be aware of when developing a foreign currency posture is the U.S federal income tax consequences of using one kind of foreign exchange instrument, or combination of instruments, over another. The major U.S federal income tax issues that arise when using derivative instruments include the amount of taxable income or loss generated by the instruments and the correct timing of its inclusion; the character of the income or loss as capital or ordinary; and the source of such inclusion for withholding tax a foreign tax credit purposes. In this article, we will examine these issues separately for certain foreign currency transactions: foreign currency options, forwards, and futures.

“Taxation of Financial Instruments,” Tax Notes, July 1997 TNT 1997-7 Taxn of Financial Instruments 

Anyone compiling a work on the taxation of financial transaction will have to consider which dimension of the subject matter of focus on, for example, participants (brokers, dealers, hedgers, investor); transactions (debt, equity, forwards, options, and their progeny); and tac concepts (realization, deferral, mark to market, accrual, bifurcation, integration). The difficulty with Taxation of Financial Instruments is that it does not appear to have chosen any particular theme. Rather, the editors compiled nine articles on disparate topics that are loosely connected with finance. Certainly, this is not the book to go to with a specific question on the taxation of forwards or options, or a number of other topics normally associated with financial instruments, although it does provide a valuable overview of some of the topics that the editors have chosen to focus on.

“Derivatives Demystified, Twice,” Tax Notes, June 1997 TNT 1997-6 Derivatives Demystified Twice

The deluge of books on derivatives has become so overwhelming, professionals will need a perpetual update annotated bibliography before they even approach the financial aisles of bookstores or libraries. The coincidence of the title of these two books is a symptom of the phenomenon. I hope to see continuing review of these types of books so that students of the financial markets can look beyond the glossy titles to the substance of the texts.