What is an ETF? — Part 25: Commodity ETFs & Taxes
September 21st, 2012 at 9:00am by Tom Lydon
Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 24: Commodity Producers]
Investors are well versed in traditional stock and bond investments, and during tax season, individuals typically know what is to be expected. However, with commodity ETFs, investors should be wary of some quirks.
For instance, if you are sitting on a commodity futures-based ETF, you may have gotten a Schedule K-1 instead of the typical Form 1099 that comes with other “1940 Investment Act” index ETFs.
Schedule K-1s come with any investment in a “Limited Partnership,” which most futures-based ETFs are structured under. Investors will usually be taxed at a 60% long-term capital gains rate and a 40% short-term rate. Additionally, unrealized gains on futures-based ETFs are marked-to-market annually – contracts held within the funds are taxed at the market value regardless of maturity at the end of the year.
Physically-backed precious metals commodity ETFs are structured as “Grantor Trusts” and are taxed like any other collectibles, which come with an ordinary income rate of up to 28%. If the precious metal ETF is held for less than a year, short-term rates can be up to 35%. Shares of physically-backed gold, silver, platinum or palladium ETFs represent a fractional ownership of the physical bullion, so the investments are taxed as if an investor held the physical metal. [What is an ETF? — Part 22: Commodities]
Investors who access leveraged/inverse commodity ETF strategies will also incur different tax consequences, since the ETFs utilize swaps and options to implement their leverage/inverse strategies. Interest income from the cash pool is taxed as ordinary income, gains are taxed as short-term capital gains and investors will have to pay taxes annually, even if you are still holding the fund into the new year. [What is an ETF? — Part 16: Inverse and Leverage Funds]
Lastly, equity-based commodity producer ETFs, much like normal equities and stock ETFs, are taxed when a position is sold, with the current 15% maximum rate on long-term gains and ordinary income on short-term gains of up to 35%.
Of course, we are not accountants and investors should still consult their tax experts.
For past stories in this series, visit our “What is an ETF?” category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.