Because they use prepaid forward contracts as opposed to actual assets, investors of ETNs do not incur capital gains taxes until the ETN is sold. Any interest or dividend income is simply added to the overall value of the ETN.
5. Partnerships
ETFs structured as a partnership are unincorporated business entities so they are not subject to the double taxation of a corporation. If the partnership does not elect to be taxed as a corporation, then it also benefits from pass-through taxation so any realized gains and losses flow directly to investors in the fund.
Partnerships are flexible in terms of the types of investments they can make. Unlike grantor trusts, partnerships can invest in other types of commodities like oil or natural gas due to their flexibility.
However, ETFs structured as a partnership fall under the regulatory measures of the U.S. Commodity Futures Trading Commission. As such, these ETFs are subject to reporting and other financial disclosures.
6. C Corporations
A C corporation is a type of corporation taxed separately from its owners. This type of ETF structure is used to access specific types of partnerships as well as other special purpose vehicles (SPVs).
By using a C corporation structure, ETFs can avoid additional regulation when it comes to holding certain asset classes. However, from a tax perspective, C corporations are subject to double taxation.
7. Exchange-Traded Managed Funds (ETMFs)
ETMFs meld the active component of mutual funds with the intraday trading flexibility of an ETF. In addition, ETMFs do not need to disclose their daily holdings, but on a quarterly basis like a mutual fund.
The net asset value (NAV) of an ETMF is available at the end of a trading day. However, not knowing the NAV means that investors can receive quotes for ETMFs that are priced not priced as accurately as that of an ETF.
ETMFs are taxed similar to open-end funds, but due to this relatively new structure, future tax liability is an unknown.
To learn more about ETF structures and more, watch the video below:
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