Beyond that, it comes down to what the commodity ETF itself owns:
- Futures Contracts. Gains and losses in ETFs such as PowerShares DB Agriculture (NYSEArca: DBA) and United States Oil (NYSEArca: USO) that own futures contracts are taxed at 60% long-term and 40% short-term, regardless of the duration the ETF is owned. Furthermore, futures-based ETFs adhere to the mark-to-market rules at year-end, which means that unrealized gains at the end of a year are taxed as though they were sold.
- Physically-Backed ETFs. ETFs that hold physical commodities – such as ETFS Physical Swiss Gold (NYSEArca: SGOL) and iShares Silver Trust (NYSEArca: SLV) – are considered “collectibles” for tax purposes. For investments held for one year or longer, the IRS usually charges collectibles at 28% capital gains. They’re taxed at ordinary income rates if owned for less than one year.
A majority of currency ETFs, much like commodity ETFs, are grantor trusts, which means that profits from the trust create tax liabilities for ETF shareholders. Further, gains in currency ETFs are taxed as ordinary income.
Even if you own the ETF for many years, there is no special treatment (such as long-term capital gains). That’s because the IRS assumes currency ETFs trade in currency pairs and that those trades happen in short time periods.
Currency exchange traded notes (ETNs), such as those offered by iPath, accrue income as currencies appreciate or depreciate against the dollar, which leads to an annual tax treatment. Gains from most ETNs are classified as capital gains, since ETNs are prepaid contracts that are based on the difference between the sale and purchase, with no other distributions in between.
By understanding how special ETFs are taxed, you can help minimize the surprises you and your clients may get at year’s end and save yourself a few headaches come April 15.
Disclaimer: If you have specific questions on how ETFs are taxed, please contact your accountant for further guidance on these issues.