TheStreet: ETFs are not completely tax-exempt; investors need to be aware of the tax rules for different products

Deep Tide TechFlow message: On July 26, according to TheStreet, although ETFs are generally more tax-efficient than mutual funds due to their in-kind creation/redemption mechanism and lower turnover rates, “higher tax efficiency” does not mean “tax-free.” There are significant differences in how different types of ETFs are taxed, and investors need to plan based on the type of holdings and the nature of their accounts.

The report says that ETFs that invest in physical gold and silver in the United States may be taxed at the collectibles tax rate; commodity ETFs that use futures contracts typically follow the “60/40” tax rule, under which 60% of capital gains are taxed at the long-term rate and 40% at the short-term rate, regardless of the actual holding period. Some foreign-exchange ETFs may have gains taxed as ordinary income, while leveraged and inverse ETFs, due to their higher turnover, may also be subject to the “60/40” rule.

TheStreet recommends that investors can reduce overall tax costs by appropriately allocating taxable accounts and tax-deferred accounts, holding ETFs long term, using tax-loss harvesting, and donating appreciated ETF shares.