Now that commodities have come down from their recent highs, are you tempted to go in on a market dip with a focused exchange traded fund (ETF)?

Commodity ETFs are popular, no doubt, especially given the bull run they’ve had this year, garnering nearly $20 billion in net inflows, reports Paulette Miniter for Smart Money, and Morgan Stanley analyst Paul Mazzilli says assets now stand at $30 billion.

ETFs such as United States Oil (USO) is the first pure oil play, with $1 billion in assets, and SPDR Gold Shares (GLD) took in an astounding $19 billion thus far. Most retail investors should understand, however, that the tax treatment for commodity funds is a little different than the usual.

While commodity ETFs do not hold actual stocks, they do own either the actual physical commodity itself, or a futures contract or a derivative. So, even if you do not sell the ETF, you will owe the government. Sixty percent of your gains are taxed at 15% for long-term and 40% of your gains are taxed at the going rate of your general income.

When you invest in the actual physical commodity with a fund such as iShares COMEX Gold Trust (IAU), the IRS taxes them as collectibles, earning them a higher long-term gain rate at 28%, not 15% charged to stocks.

If and when you decide to dip into the commodity ETF pool, just be aware of these facts and how taxes work when it comes to commodities, and consider them when making your decision.

Tags: Agriculture, Commodity ETFs, Energy, GLD, Gold, IAU, Oil, Precious Metals, USO