Swaps are in your funds. How are they taxed?

There is no cost basis in a notional principal contract
01

Swaps are everywhere

Swaps power the institutional financing and hedging ecosystem, with over $700 trillion in notional principal outstanding. ETFs, mutual funds, and partnerships also use them for capital-efficient exposure. How do they work, and how are they taxed?

Total Return & Index Swaps rates • equity indices • credit • commodities Capital-Efficient Exposure ETFs Mutual Funds Limited Partnerships

From institutional desks to ETFs, mutual funds, and partnerships, swaps deliver capital-efficient exposure.

Source: BIS OTC Derivatives Statistics (H1 2025)
Theme 2: Mechanism
02

A swap trades cash flows, not the asset itself

The swap tracks a reference asset and sits inside a wrapper: an ETF, mutual fund, or partnership. Both choices shape the tax later.

Fund Bank Financing: SOFR + Spread Asset Return: Index or Stock Minimal collateral, full exposure, no upfront purchase

A notional principal contract (NPC) swaps index-based payments, delivering exposure without owning the asset.

Source: Treas. Reg. §1.446-3(c)
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Educational only. Not investment, tax, or legal advice.