In theory, an ETF investor can defer capital gains in perpetuity.  If he never sells, he never has to pay tax.  In practice, many investors will decide to sell their ETFs and will realize gains at that time.  Again, however, it’s important to note there are still many instances where investors may not ever pay capital gains tax.  For example, if an investor holds ETFs until their death, under current law their beneficiaries will receive a step up in basis as of the date of death.  If an investor decides to donate shares of an ETF to charity, under current law he will also avoid payment of capital gains taxes.  There may also be opportunities in retirement, when many investors have lower tax brackets, to sell portions of their investment at decreased tax rates.  In any event, the tax efficiency of ETFs puts the control of these decisions with the investors and their tax professionals, rather than with portfolio managers.

Many of us already receive unwanted gifts this holiday season.  You can avoid another gift you didn’t ask for by adding exposure to a tax efficient ETF portfolio.

This article was written by Ryan Gilmer, CFA, who is Vice President – Investment Management at TOPS ETF Portfolios, a participant in the ETF Strategist Channel.

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