How is the tax treatment of Equity- and Commodity-linked ELEMENTS different from that of a traditional bond?
It is generally intended that ELEMENTS based on stock or commodities indices be treated as prepaid contracts for tax purposes. In contrast, corporate bonds are normally treated as debt for tax purposes, which means that interest payments on typical corporate bonds are treated as income and principal payments are treated as return of capital. Special rules applicable to certain corporate bonds with contingent payments require an investor to recognize income prior to realization and to treat any gain on the sale of such a bond as ordinary income. In contrast, under the intended tax treatment of Equity- and Commodity-linked ELEMENTS, investors should only realize capital gains or losses upon the sale, maturity or repurchase by the issuer of their Equity- and Commodity-linked ELEMENTS.
