Exchange-Traded Funds (ETFs)

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

Securities ETFs

Securities ETFs use the regulated investment companies (RIC) structure.

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

Commodities/Futures ETFs

Regulators do not permit commodities/futures ETFs to use the RIC structure, so usually, they are structured as publicly traded partnerships (PTPs). Commodities/Futures ETFs issue annual Schedule K-1s passing through their underlying Section 1256 tax treatment to investors, as well as other taxable items. Selling a commodities ETF is deemed a sale of a security and calls for short- and long-term capital gains tax treatment using the realization method.

Taxpayers invested in commodities/futures ETFs may need to make some cost-basis adjustments on Form 8949 to capital gains and losses, ensuring they don’t double count some of the Schedule K-1 pass-through items. For example, if the K-1 passes through Section 1256 income to Form 6781, the taxpayer should also add that income to the cost basis on Form 8949. Otherwise, it will be double-counted and thus will cause an overstatement of tax liability. Form 1099-Bs and trade accounting solutions do not automatically make these cost-basis adjustments from K-1 income/loss, so be sure to make the adjustments manually on Form 8949.

Physically backed precious metals ETFs

These 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 issues an annual Schedule K-1, passing through tax treatment to the investor, which, in this case, is the “collectibles” capital gains 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” capital gains tax rate — capped at 28%. (If your ordinary rate is lower, use that.) That rate is higher than the top regular long-term capital gains rate of 20% (2019 and 2020). Short-term capital gains are taxed at the ordinary rate. Physically backed precious metals ETFs are not securities, so they are not subject to wash-sale loss adjustments or Section 475 if elected.

For more information, see Green’s Trader Tax Guide