7700 / What is a structured product? How are structured products taxed?

“Structured products are not specifically defined in the securities laws. They have been described as securities that may be derived from or based on a particular security or commodity, a basket of securities, an index, a debt issuance, or a foreign currency. Many involve innovative financing techniques creating customized financing and investment products to suit specific financial needs of customers. They may involve complex “tranched” (i.e., segmented) liabilities and transfers through special purpose vehicles. Such transactions may be structured for any number of reasons – for example, for principal protection, tax minimization, accounting cosmetics, monetization, or other specific purposes.”¹ Some of the more popular types of structured products sold to retail investors include principal-protected notes, equity-linked notes, and indexed-linked notes.

The taxation of a structured product will depend on the tax treatment of its individual components. See Q 7517 – stock; Q 7556 through Q 7585 – options; Q 7634 through Q 7638 – corporate bonds; Q 7643 through Q 7649 – market discount; and Q 7650 through Q 7654 – original issue discount.