ETFs and taxes

Consult your tax advisor on the tax impacts of specific exchange-traded fund (ETF) investments. But you may also want to consider the following:

  • ETFs are generally more tax efficient than comparable index-based mutual funds, because you usually only pay capital gains on ETFs based on gains or losses when you buy and sell.
  • Most ETFs avoid the additional, periodic taxable gains distributions typical of mutual funds because ETF portfolio trades are structured as non-taxable ‘in-kind’ transactions (how ETFs work).
  • However, some ETFs, especially those using sophisticated methods of holding assets (such as futures contracts or swaps), do make occasional capital gains distributions.
  • Gold and silver ETFs are taxed differently than most ETFs, because the IRS categorizes those metals, if held more than 12 months, as ‘collectibles.’ Long term gains in gold and silver ETFs are therefore taxed at 28% rather than the usual 15%. Shares held for less than twelve months are taxed at ordinary income tax rates.