The tax breaks given to exchange traded notes (ETNs) were once considered an entry in the "pro" column for the funds, but now those breaks may become non-existent.

The IRS, which has been considering the tax treatment of ETNs for awhile now, finally ruled earlier this month that ETNs tracking foreign currencies should be considered debt for tax purposes, reports Lawrence Carrel at TheStreet.com. Because of the ruling, both capital gains and interest will be taxed as ordinary income on these notes, at rates of up to 35%. Ouch.

Before the ruling, any difference between the sale and the purchase price of an ETN would be considered capital gains, and holding onto an ETN for more than a year would mean you’d get the long-term capital gains rate. Now, not only are investors taxed on this income, they don’t actually see the income until they sell their shares, which could come well after the taxes have been paid.

Just to be clear: this only affects currency-related ETNs. The IRS has yet to decide on ETNs that track stocks and commodities.

Tags: Currency ETFs, ETNs