Commodities ETFs and other funds that utilize futures contracts to gain exposure to the underlying market are structured as limited partnerships. Consequently, investors may have to fill out a Schedule K-1 instead of Form 1099, and they may incur Unrelated Business Taxable Income (UBTI), which could be taxable in an IRA – most ETFs, though, provide K-1s in a timely manner and typically do not generate UBTIs. Futures-backed ETFs are taxed based on the 60/40 rule – 60% long-term gains at a maximum 23.8% rate and 40% short-term gains at a maximum 43.4% rate – regardless of how long the investor holds the ETF. Additionally, at the end of the year, the ETF must “mark to market” all outstanding contracts and treat them as if the fund sold those contracts, and investors would realize those gains for tax purposes.
Currency ETFs come in three structures: 1) Open-end funds, or ’40 Act funds, are taxed like stock and bond ETFs at a maximum 23.8% long-term rate and maximum 43.4% short-term rate. 2) Currency ETFs structured as grantor trusts, similar to precious metals ETFs, but gains are always treated as ordinary income at a maximum 43.4% rate. 3) Funds structured as limited partnerships issue K-1 statements and follow the 60/40 long-term/short-term rule.
While trading ETFs, investors may come across exchange traded notes. ETNs are not ETFs. ETNs are a type of bond or debt security issued by an underwriting bank and subject to the credit risk of the issuer. Gains in stock, bond and commodity ETNs are taxed at a maximum long-term 23.8% rate and maximum 43.4% rate. Currency ETNs, though, are taxed as ordinary income at a maximum 43.4% rate.
For more information on ETFs and taxes, visit our taxes category.