Losses up to $3,000 can be written off on an investor’s tax return, but losses beyond can only be used or carried over for future years.
At the end of 2007, ETFs held $608.4 billion in assets compared to $12 trillion in mutual funds. As of the end of September 2008, ETFs had $579 billion in assets compared to $10.6 trillion; that’s a 5% loss for ETFs and a 12% loss for mutual funds.
ETFs have fewer transactions per sales of individual stocks than mutual funds, which translates to fewer gains to tax. It is rather uncommon for ETFs to pay capital-gains distributions, but it’s not impossible.
ETFs are not as likely to have to sell securities for investor redemptions whereas mutual-fund investors do. Understanding ETF creations and redemptions illustrates how this is so.
Among certain ETF providers, WisdomTree has announced zero capital gains distributions; State Street Global Advisors will put their estimates up on their website on Nov. 21 and iShares has estimated distributions in two funds: iShares Cohen & Steers Realty Majors (ICF) and Lehman Short Treasury Bond (SHV).
For those considering selling a fund to avoid capital gains, they need to consider the length of their current investments. If it has been held for a long time, then the long-term gains may be more than the short-term distribution which makes it more costly to move.
For information about a specific mutual fund, you can visit the provider’s website. As always, consult your tax professional for specific advice.