Improved TradeLog Support for Exchange-Traded Notes (ETNs)

Published: June 4, 2018
Tagged: Trader Taxes, ETN

Let's talk about ETNs. The trader world continues to evolve with new trading products and the interpretation of tax rules to go with them. Exchange-traded notes (ETNs) have come under more scrutiny by tax experts in recent years, especially the treatment of volatility ETNs which have become very popular products. Recent improvements to TradeLog Software provide enhanced support for traders of ETNs.

While the IRS did provide a ruling in 2008 regarding foreign currency ETNs (IRS Rev. Ruling 2008-1), they have not provided definitive guidance regarding other ETN products. Over the past few years some sources have suggested giving Section 1256 treatment for ETNs, especially volatility ETNs like VXX, to benefit from lower 60/40 tax rates. However, leading authorities have argued to the contrary. For example, the trader tax experts at Green, Neuschwander & Manning, LLC have published strong arguments against such treatment. In fact, they determined there is no “substantial authority” for Section 1256 treatment of VXX. You can learn more about this argument at the Green Trader Tax blog if you want to dig into the details.

What do the experts recommend for ETN treatment?

Determining ETN tax treatment depends much on the structure of each particular ETN. In our new Resource page: Exchange-Traded Notes (ETNs) Tax Treatment, we explain and break down three classifications of ETNs determined by their structure, and the tax treatment suggested by leading trader tax experts:

  1. Foreign Currency ETNs – reported as Ordinary Gain/Loss (Section 988)
  2. Debt Security ETNs – reported as Capital Gains/Losses (Form 8949), adjusted for wash sales, and eligible for Sec. 475 MTM with a qualified election – most ETFs have this same treatment
  3. Prepaid Forward Contract ETNs – reported as Capital Gains/Losses (Form 8949), not adjusted for wash sales, not eligible for Sec. 475 MTM

You can read the detailed explanation in our Resource page as to why each type is treated differently. And check out the chart to help you see the differences. You’ll notice it’s important for ETN traders to examine the prospectus for the products they trade and consult with a trader tax professional if there is any question about proper tax treatment.

What’s new in TradeLog to support these ETN classifications?

Our recent update to TradeLog allows ETFs and ETNs to be classified with three different sub-types in the Global Options settings, each with a unique type/multiplier code for identification in the software:

We’ve updated our online Support Center with an article explaining ETF/ETN Settings in Global Options. You can check this out to understand how to review, update, and apply these changes.

To benefit from these improvements:

  1. Update your TradeLog Software to the most recent update - Click here for help
  2. Open your current tax-year file
  3. Apply the ETF/ETN Settings by opening Global Options, navigate to the ETF/ETN tab, review the defined symbols then click OK to apply to your TradeLog data - Click here for detailed instructions

Important Note: if you already ended the tax year on a file you would need to reverse this function to make any edits. But keep in mind that applying these changes to previous files may require that you re-file tax reporting for those previous year(s). This may not be necessary so consider your situation and needs before you create extra work! We recommend users apply these settings with the current tax year they are working on.

What if you don’t agree with the default classifications in TradeLog?

We typically base our defaults on published opinions by industry experts, however, these are by no means definitive. You’re responsible for your tax reporting. The Global Options settings can be adjusted as required for your situation.

Why should you care about your ETN classification and reporting?

Some traders have been reporting ETNs like stocks for years, why should you care now? The number one reason is there are potential tax benefits. Since wash sale rules may not apply for some ETNs, you could avoid potentially negative tax loss deferrals – this may reduce your tax liability.

As more and more CPAs and tax attorneys establish “substantial authority” and opinions on ETN tax treatment this may also guide future IRS rulings and guidance. Using TradeLog can help you make sure your reporting is up-to-date with current trader tax experts.

Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.