The tax season has come and gone, but just because you won’t need to file another tax form for another year, it doesn’t mean that you shouldn’t think about taxes year round to better prepare for next time. One way many investors squeezed out better tax efficiency is by switching from mutual funds to exchange traded funds (ETFs).
Passive management, trading on secondary markets and in-kind redemption by authorized participants are ways that ETFs have beat mutual funds, comments Don Dion for TheStreet. There are various types of ETFs, each with their own different tax implications, and investors should be aware of the differences between they invest.
The plain, regular ol’ ETF that tracks a basket of equities are taxed the same as gains are taxed for equities of individual companies. For instance, ETFs that track main indexes like the Dow and S&P or specific sectors like financials and technology. The same is true for ETFs that track a basket of companies traded on foreign stock exchanges. [ETFs and Taxes: What You Should Know.]
Dividend distributions that are made from certain equity-based ETFs are also taxed the same as dividends from a single equity, and investors will need a 1099 form. [What You Should Know About Dividend ETFs and Taxes.]
Commodities have recently been a hit with investors, but it should be noted that there are different tax treatments for physically-backed commodity ETFs and ETFs that invest in futures. Or, one may use commodity exchange traded notes (ETNs), which do not make taxable distributions and are taxed based on gains made at the time they are sold. Additionally, ETNs don’t have to deal with the K-1 form. [How to Handle a K-1 Form.]