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.

Highlighted Recent Recordings:

*Entities & Employee-Benefit Plans
*Current Developments in Tax Law that Affect Traders
*Accounting for Traders
*The Section 1256 club is hard to get into: Futures on foreign exchanges often donít qualify
*Puerto Ricoís tax haven status
*Entities: A key update on trading entities and management companies
* 2013 Tax Filings For Traders & 2014 Tax Planning
*Forex Tax Treatment & Planning
*Trader Tax Law Update: Current Developments
*2014 Tax Planning & Will an Entity Help Lower Your Tax Bill?
*Audits of Performance Records

Trader Tax Center

Tax Newsletter & Calculators

Highlights (see the full archive):

Aug 19: Foreign partners in a U.S. trading partnership can be tax free Read More

Aug 13: IRS warns Section 475 traders Read More

June 20: Tax treatment for Nadex binary options Read More

June 19: IRS softens its stance for some taxpayers with undeclared offshore accounts Read More

June 12: IRA rollover rule changes Read More

June 6: Bitcoin is not reported on 2013 FBARs Read More

June 5: Tax deadlines in June: U.S. residents abroad and FBAR Read More

June 2: Tax treatment for foreign futures Read More

May 21: Bitcoin tax update: Can business traders apply Section 475 elections to bitcoin trades? Read More

May 13: Puerto Ricoís tax haven status is tailor made for investors, traders and investment managers Read More

May 6: Entities: A key update on trading entities and management companies Read More

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

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

Feb 1: Net investment tax details 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 ďassuranceĒ from quality independent CPA firms. Read More

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

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

Aug 18: Common trader tax mistakes Read More

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

GreenTrader blog archive, Forbes blog, Benzinga blog.


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