What Makes ETFs Tax Efficient?

By Paige Corbin via Iris.xyz

Exchange-traded funds (ETFs) have many benefits that have caused them to expand in terms of assets and offerings over the past decade. In the United States alone, the ETF industry has grown to over $2.7 trillion in assets.1 Not only are ETFs typically low cost and extremely transparent, a key characteristic and an attractive feature is their tax efficiency.

Capital Gains

Let’s start from the beginning. Capital gains taxes can occur in two ways. The first is on an individual level, when one sells an ETF or a mutual fund at a gain in a taxable account. For example, if an investor purchased an ETF for $25 and later sold it for $40, he or she would have to pay capital gains tax. The same exact taxation treatment exists for mutual funds and individual stocks; this cannot be avoided.

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