Generally, convertible notes are treated as being on revenue account for income tax purposes. That is, any gains or losses realised upon their disposal, conversion or maturity will be on revenue account.
However, where an investor converts the note and receives ordinary shares (or other such securities), these shares or securities will be on capital account and subject to the capital gains tax (CGT regime). As such, any gains realised may be able to be reduced by the CGT discount where the relevant conditions are met. Available capital losses may also be used to offset any capital gains.
In some circumstances, convertible notes may be treated as CGT assets from the date of issue. Common examples of these are hybrid securities issued by banks and financial institutions. The tax treatment in these circumstances is explained in the CGT section.