Exchange-Traded Funds (ETFs)

ETF tax treatment is often very confusing, but we can help.

Many different ETF structures are used and tax treatment can be very confusing to some — but not us.

Securities ETFs

Securities ETFs are usually registered investment companies (RICs). Selling a securities ETF is deemed a sale of a security, calling for short-term and long-term capital gains tax treatment.

Commodities/futures ETFs

Commodities/futures ETFs are publicly traded partnerships (PTPs). They issue annual Schedule K-1s passing through Section 1256 tax treatment on Section 1256 transactions to investors, as well as other taxable items. Selling a commodities ETF is deemed a sale of a security, calling for short-term and long-term capital gains tax treatment. Taxpayers invested in commodities/futures ETFs should make cost-basis adjustments on Form 8949 to capital gains and losses, ensuring they don’t double count Schedule K-1 pass through income or loss.

Precious metals ETFs

Physically backed precious metals ETFs are publicly traded trusts (PTTs), also known as a grantor trust. A PTT issues an annual Schedule K-1, passing through tax treatment to the investor, which in this case is the “collectibles” rate on sales of physically backed precious metals (such as gold bullion). Selling a precious metal ETF is deemed a sale of a precious metal, which is a collectible. If collectibles are held over one year (long-term), sales are taxed at the “collectibles” tax rate — the taxpayer’s ordinary rate capped at 28%. That rate is higher than the top long-term capital gains rate of 20% (2015 and 2016 rates).

Options on ETFs

The IRS hasn’t clearly stated tax treatment on sales of options based on ETFs. Our position is that options on securities ETFs that are organized as RICs are treated as securities and options on commodities ETFs structured as PTP are Section 1256 contracts. Tax treatment of options on precious metals ETFs is unclear; some tax professionals make a case for Section 1256 treatment as a non-equity option.

For more in-depth information on ETF tax treatment, read Green’s 2016 Trader Tax Guide.