We’re in the homestretch of 2009. That means it’s time to start thinking about holiday celebrations, updating your gift wish list, decorations…and taxes. Many exchange traded fund (ETF) providers are making their capital gains distributions announcements, but how does it affect you?
Most ETFs do not shoot off capital gains, but every once in awhile they may. (How ETFs are taxed). In layman’s terms, capital gains are the difference between what one pays for an investment and what gets for it when it’s sold. Capital gains are further broken down by holding periods into two categories, long-term and short-term. The taxes you’ll pay depend on your holding period. (ETF trading strategies).
A long-term capital gain or loss is a gain or loss on an investment that has been held for longer than one year, whereas a short-term capital gain or loss is one that has been held for under one year. According to Bank Rate.com, long-term capital gains are generally taxed at the favorable rate of 15% and can even by tax-free for some. As for short-term capital gains, they are taxed at ordinary income tax rates, which can get as high as 35%.
It gets even a little trickier when it comes to some commodity ETFs, like the ones that physically hold gold and or silver. (How precious metals are taxed). These are treated as collectibles and taxed at 28%. Because of the complexity of the Internal Revenue Code, it is important to know what your ETFs hold, how long you have been holding them and consult with your accountant, as that we are not tax experts.
For more stories on taxes, visit our tax category.
Kevin Grewal 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.