Exchange traded notes would lose a key tax benefit under a proposal from House Republican Dave Camp of Michigan, according to a Bloomberg News report Wednesday.
Camp wants to require mark-to-market taxation of derivatives. “Through that system, ETN holders would determine the products’ value each year and pay taxes at ordinary income rates on any change, even if they haven’t sold the securities,” according to the story.
“Holders of assets that generate dividends and capital gains must pay taxes in the year those are received,” Bloomberg reports. “By contrast, an ETN doesn’t generate such income, and holders don’t have to pay taxes until they sell the note.”
ETNs have important differences from exchange traded funds, or ETFs. [Comparing ETNs and ETFs]
ETNs are debt securities issued by financial institutions that promise to pay the return of an index, minus fees and taxes. Therefore, investors are exposed to the credit risk that the issuer goes bankrupt. [What is an ETF? — Part 12: Exchange Traded Notes]