Shorting-against-the-box is when an investor has a long position in a stock and then takes a short position in the same (or substantially identical) stock.
This was a popular tax strategy since it allowed investors to fully hedge their long exposure without paying tax. That is, until Congress established IRC §1259 in the late 1990s which treated the short as a "constructive" sale, and the tax immediately due.
Constructive ownership, in the adjacent IRC §1260, has a similar flavor.
If a fund uses a swap to replicate the total return of another fund, then §1260 says "hey, you pretty much own the other fund, so we're gonna tax you, the fund, as if you own the other fund," which often means any tax deferral benefits are charged interest and the preferential tax rates are recast as ordinary income.
Read how swaps are taxed to get up to speed on why you should care about swaps, including several examples and illustrations.
Today's post is a calculator that illustrates when and how a swap is recast. If you remember anything from this investigation into swap taxation, it should be that an ETF or other fund generally uses a swap for 1) capital efficient exposure, and 2) possible tax-efficiency if structured properly.
The calculator contains several canned scenarios, each illustrating a different aspect of how a swap (in this context) may be taxed.