The Internal Revenue Service's proposed rules on the taxation of hedging transactions will have more impact on swap providers than on issuers or investors in the municipal market, according to tax lawyers.

The new rules would allow a taxpayer to treat gains or losses from a hedging transaction as ordinary income, even when the hedging uses derivatives. The proposal reverses the five-year-old IRS policy that some gains and losses on hedges, including those with derivatives, could be considered capital income.

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