The Nuances of ETF Tax Consequences

“We believe this combined with the fact that Vanguard’s ETF and mutual fund share classes have experienced strong inflows and have been less able to shed itself of less tax efficient securities, contributes to BIV’s estimated modest $0.26 capital gain for 2014 (0.3% of its net asset value),” Rosenbluth said.

According to fund company data, 24 of 324, or 7%, iShares ETFs are expected to pay a capital gain while 13% of Vanguard’s 68 ETFs will have a capital gain, with the majority from fixed-income ETFs.

Additionally, Rosenbluth pointed out that currency-hedged ETFs use currency derivatives that are rolled forward each month, which are not treated in kind. As the U.S. dollar appreciated against the euro and the yen, investors have incurred capital gains. The IRS treats currency forward contracts as 40% short-term and 60% long-term for tax purposes.

“As with many aspects of ETF analysis, there is no one size fits all approach,” Rosenbluth added. “The fund’s structure and the activities of the asset manager play a meaningful role in its tax efficiency.”

For more information on investing in ETFs, visit our ETF 101 category.

Max Chen contributed to this article.