Exchange-Traded Funds (ETFs)

Exchange-traded products use different legal wrappers — including RIC ETFs, publicly traded partnerships, grantor trusts, and ETNs — and federal tax treatment varies by structure.

Securities ETFs usually are regulated investment companies (RICs).

Like mutual fund RICs, securities ETFs pass through their underlying ordinary and qualifying dividends to investors. Selling a securities ETF is a sale of a security, which calls for short- and long-term capital gains tax treatment under the realization method. A securities ETF RIC is a security, so wash-sale loss adjustments or Section 475 apply if elected.

Commodities/futures ETFs.

Commodities/futures ETFs are publicly traded partnerships (PTPs). Commodities/futures ETFs issue annual partnership Schedule K-1s, which pass through their underlying Section 1256 tax treatment to investors and other taxable items. Add the 1256 income to the cost basis, as 1099-Bs don’t have that information. Selling a commodities/futures ETF is a sale of a security, and because it is widely held, it calls for short— and long-term capital gains tax treatment under the realization method. As a security, wash-sale loss adjustments or Section 475 apply if elected by a TTS trader.

Physically backed precious metals ETFs.

Physically backed precious metals ETFs use the publicly traded trust (PTT) structure. A PTT issues an annual Schedule K-1, passing through tax treatment to the investor. Selling physically backed precious metals ETFs is taxed at the “collectibles” long-term capital gains tax rate — capped at 28%. (If the ordinary rate is lower, use it.) Physically backed precious metals ETFs are not securities under Section 1091, so they are not subject to wash-sale loss adjustments. The above tax treatment applies to investors and TTS traders who do not use Section 475.

For TTS traders using Section 475, beneficial ownership interests in commodity ETFs structured as publicly traded partnerships (PTP) and precious-metal ETFs structured as publicly traded trusts (PTT) fall within the definition of securities under §475(c)(2). Options on these ETFs are also included in Section 475.

For more information, see Green’sTraderTaxGuide Chapter 3, Tax Treatment of Financial Products.