Exchange-Traded Funds (ETFs)

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

Securities, commodities and precious metals ETFs use different structures and tax treatment varies.

Securities ETFs

Securities ETFs are 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 use the publicly traded partnership (PTP) structure. 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 an adjustment to cost-basis on Form 8949 (capital gains and losses), ensuring they don’t double count Schedule K-1 pass through income or loss. Form 1099-B and software does not make this adjustment, so you need to make a manual adjustment.

Precious Metals ETFs

Physically backed precious metals ETFs use the publicly traded trust (PTT) structure, 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 you hold a collectible over one year (long-term), sales are taxed at the “collectibles” 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 explicitly stated tax treatment on sales of options based on ETFs. Our position is that options on Securities ETF RICs are securities since they are like equity options. But, options on Commodities ETFs structured as PTP are Section 1256 contracts since they are non-equity options. 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, see our blog archive and read Green’s 2016 Trader Tax Guide.

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