See our Updated Trader Tax Center pages.

ETFs & ETF options: A major tax update

Our new ETF tax research and compelling arguments from Robert Green, CPA and tax attorneys Mark Feldman and Roger Lorence make this article a must-read.

The highlights:
Sales of commodities/futures ETFs are sales of securities, not a sales of a futures contract. Commodities/futures ETFs pass through portfolio income, including Section 1256 (futures) tax treatment.

We detail our arguments for using Section 1256 lower 60/40 tax rates on most options ETFs. We also explain the opposing arguments the IRS could raise and suggest special tax return footnote disclosure or obtaining a tax opinion letter.

A lot of ETF taxation content on the Internet isn't correct. Our in-depth article answers many tax questions, but not all. ETFs cover the gamut of instruments, many different structures are used and tax treatment is very confusing.

Click here to read our blog article "ETF tax and regulatory issues" dated March 23, 2011.

Overview of ETF tax treatment:

Securities ETFs: Securities ETFs are usually Registered Investment Companies (RICs). Like mutual fund RICs, securities ETFs pass through their underlying ordinary and qualifying dividends to investors. When you sell a securities ETF, it's deemed a sale of a security, calling for short-term and long-term capital gains tax treatment.

Commodities/futures ETFs: Commodities/futures ETFs may not use the RIC structure, so they are usually publicly traded partnerships (PTPs). Commodities/futures ETFs issue annual Schedule K-1s passing through their underlying Section 1256 futures tax treatment on futures transactions to investors, as well as other taxable items too.

When you sell a commodities/futures ETF, it's still deemed a sale of a security, calling for short-term and long-term capital gains tax treatment. That may be counter-intuitive, since it's a commodities/futures ETF, and the ETF itself is still considered a security for tax purposes. We elaborate on this point and ETFs in the article.

Precious metals ETFs: Physically backed precious metals ETFs may not use the RIC structure either. Although they could use the PTP structure, they usually choose the publicly traded trust (PTT) structure (also known as a grantor trust). A PTT also issues an annual Schedule K-1 passing through tax treatment to the investor, which in this case is the "collectibles" long-term capital gains tax rate on sales of physically backed precious metals (such as gold bullion).

The sale of a precious metal ETF is not a sale of a security, but rather it's deemed a direct sale of physically held precious metals applying the "collectibles" long-term capital gains tax rate. (The short term rate applies in those instances, too.)

Options on ETFs have unclear tax treatment. The IRS hasn't clearly stated tax treatment on sales of options based on ETFs. Many tax attorneys make the case that sales of exchange-listed options on broad-based securities ETFs as well as on commodities or futures ETFs should be treated as Section 1256(g)(3) non-equity options, with lower 60/40 tax rates. If you wish to take such a position, you should consider getting a tax opinion in order to protect yourself from penalties. Sales of options based on narrow-based securities ETFs are treated like securities.

If you have any questions on tax treatment for ETFs and options on ETFs, consider a consultation.

Many Webinars in March

Highlighted Recent Recordings:

*Entities & Retirement Plans for Traders
*Trader Tax Law Update: Current Developments
*2013 Tax Reporting & 2014 Planning
*Forex Taxation
*Audits of Performance Records
*Kick-Off to 2013 Tax-Filings for Traders
*ObamaCare taxes are starting to affect traders
*The Tax Court Was Right To Deny Endicott Trader Tax Status
* Investment management: Key updates
*Learn the DOs and DON’Ts of using IRAs and other retirement plans

Trader Tax Center

Tax Newsletter & Calculators

Highlights (see the full archive):

Mar 27: Protect yourself from market losses with a Section 475 MTM election Read More

Mar 25: IRS guidance on bitcoin transactions will chill its use Read More

Mar 24: SEC Large Trader Reporting Rule Read More

Feb. 27: Another trader tax court loss (Assaderaghi) Read More

Feb. 1: Net investment tax details Read More

Jan 14: New IRS guidance on SE tax deductions affects partnership AGI-deduction strategies. Read More

Jan 9: A major tax reform bill in 2014 is unlikely, and “tax extenders” may be history, too. Read More

Jan 7: Kick off to 2013 tax filings for traders. Read More

Dec 4: IRS final regulations for Net Investment Tax help traders. Read More

Dec 3: Bitcoin is a hot commodity, but is it taxed like commodities, assets, or currencies? Read More

Nov 15: Another non-business trader gets busted in tax court trying to cheat the IRS. Read More

Nov 6: Hedge fund investors depend on “assurance” from quality independent CPA firms. Read More

Oct 29: ObamaCare taxes are starting to affect traders. Read More

Sept 15: Not Easy For New Yorkers To Escape Big Apple's Tax Bite. Read More

August 30: The Tax Court Was Right To Deny Endicott Trader Tax Status Read More

August 18: Common trader tax mistakes Read More

July 24: Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments Read More

March 31: PFG investors can deduct theft losses on 2012 tax returns with Rev. Proc. 2009-20 safe harbor relief. That’s great news! Read More

March 5: Caution, downloading securities Form 1099-Bs into TurboTax often leads to incorrect tax filings Read More

Sept 5: High-income traders and ObamaCare’s 3.8% Medicare tax Read More

GreenTrader blog archive, Forbes blog, Benzinga blog.


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