The IRS said in November that when one party makes a termination payment to get out of an interest rate swap, the other party can report its gain over the remaining period the swap would have run. This assumes that the underlying loan against which the swap served as a hedge remains outstanding. If the loan is also retired, then the remaining gain must be reported at that time.

The IRS analysis is in Revenue Ruling 2002-71. The swap in the ruling was used as a hedge. The rules for other types of swaps used as hedges — for example, to hedge commodity risk — are more complicated.