FROM THE OFFICE OF PUBLIC AFFAIRS
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July 19, 2004
JS-1794
Treasury and IRS Seek Information Regarding
Credit Default Swaps in Order to Address
Taxpayer Requests for Guidance
Today, the Treasury Department and the IRS issued a Notice requesting information regarding certain financial transactions commonly known as credit default swaps.
Taxpayers and industry groups have requested specific guidance regarding the tax treatment of credit default swaps. A large international market for credit default swaps has developed, and the requests for guidance focus on the treatment of payments from
"This is an important market that has grown very rapidly and continues to evolve," stated Acting Assistant Secretary for Tax Policy Gregory Jenner. "We understand the need for guidance in this area. The purpose of this Notice is to ask for the information that we need in order to be able to provide the kind of specific and comprehensive guidance taxpayers have requested," Mr. Jenner concluded.
A credit default swap generally refers to a contractual arrangement in which one party buys from a counterparty protection against default by a particular obligor with respect to a particular debt obligation. Following a default, the protection seller typically either pays the protection buyer an amount reflecting the reference obligation's loss in value or purchases from the protection buyer at a pre-determined price an obligation that is expected to approximate the post-default value of the reference obligation. Market participants use credit default swaps for a variety of purposes, including risk management, speculation, and acquisition of synthetic exposure.
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