A disagreement between exchange traded note (ETN) sponsors and the mutual fund industry, represented by the Investment Company Institute, is heating up. The dispute regards the tax treatment of the two types of funds, with ICI claiming that ETNs are given an unfair advantage. ETNs are taxed when a share is sold, just as single stocks and ETFs. ICI wants ETNs to report accrued income the same way mutual funds do, reports Jesse Emspak for Investor’s Business Daily.

A typical open-ended mutual fund is required to payout  dividends to shareholders which are taxed at the ordinary income tax rate instead of the preferred long-term capital gains rate. ETN shareholders pay taxes on the income as it comes in from the securities that make up the ETN.

The Securities Industry and Financial Markets Association (SIFMA) believes ETNs should keep their tax treatment because an ETN is more like a futures contract. ETNs are debt instruments and the investor assumes the risk that the provider could default.

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