Tax Implications of ETFs
Exchange Traded Funds (ETFs) are investment funds that hold different commodities, stocks, or bonds unified under a common factor.
There are various ETFs that hold different stocks or commodities.
However, the funds hold a particular unified commodity or stock such as stocks on the Dow Jones index or stocks in the biotechnology industry.
Recent ETF Popularity ETFs have been around since early 1990s but have became popular after the 2008 market crash that saw many investors lose out on much of their wealth in regular stock investments and mutual funds.
Therefore, to diversify from traditional investing in a particular stock or in mutual funds, an investor with a small fund can now diversify into gold, diamonds, category stocks, stock indexes, currency, and other assets considered of less risk.
EFTs have also become popular because analysts have discovered that in the long run, the index performance tend to outperform fund managers and investment advisers.
Advantages of ETFs The ETFs have the advantage of trading throughout the day and because they are based on the performance of indexes or on categories of commodities or stocks, the investor can know at any time the value of their investment.
EFTs are therefore, a very easy and cheap way of investing in commodities, currencies, and in category counters as compared to the traditional ways of investing.
Furthermore, ETFs do not have other investment complexities such as leveraging, borrowing funds, or dealing with futures and options and are a straightforward way of investing.
Many investors are now shying away from these complex and leveraged investment vehicles, as they seem to be hard hit in the event of an economic downturn.
EFT Tax Risks However, in spite of their reduced risks and their promising performance, most ETFs will have extra processes and complexities when it comes to filing taxes.
Since mutual funds are in many cases not allowed to hold commodities directly, many ETFs are run as corporations, partnerships, or unit trusts.
Unfortunately, these structures come with many tax implications.
Partnerships for example, are expected to pay income taxes in every state that they make an income from and the taxes are paid directly by the investors.
Therefore, depending on the composition of a given ETF, an investor may be forced to file many tax returns to different states; a process that is both expensive and tedious.
Besides the state taxes for partnership ETFs, some commodities, such as metals, are taxed at a higher rate of 28% (as opposed to the 15% capital gain tax rate) since they are considered as collectibles.
Other tax implications include unexpected tax filing and expensive tax preparation costs.
There are various ETFs that hold different stocks or commodities.
However, the funds hold a particular unified commodity or stock such as stocks on the Dow Jones index or stocks in the biotechnology industry.
Recent ETF Popularity ETFs have been around since early 1990s but have became popular after the 2008 market crash that saw many investors lose out on much of their wealth in regular stock investments and mutual funds.
Therefore, to diversify from traditional investing in a particular stock or in mutual funds, an investor with a small fund can now diversify into gold, diamonds, category stocks, stock indexes, currency, and other assets considered of less risk.
EFTs have also become popular because analysts have discovered that in the long run, the index performance tend to outperform fund managers and investment advisers.
Advantages of ETFs The ETFs have the advantage of trading throughout the day and because they are based on the performance of indexes or on categories of commodities or stocks, the investor can know at any time the value of their investment.
EFTs are therefore, a very easy and cheap way of investing in commodities, currencies, and in category counters as compared to the traditional ways of investing.
Furthermore, ETFs do not have other investment complexities such as leveraging, borrowing funds, or dealing with futures and options and are a straightforward way of investing.
Many investors are now shying away from these complex and leveraged investment vehicles, as they seem to be hard hit in the event of an economic downturn.
EFT Tax Risks However, in spite of their reduced risks and their promising performance, most ETFs will have extra processes and complexities when it comes to filing taxes.
Since mutual funds are in many cases not allowed to hold commodities directly, many ETFs are run as corporations, partnerships, or unit trusts.
Unfortunately, these structures come with many tax implications.
Partnerships for example, are expected to pay income taxes in every state that they make an income from and the taxes are paid directly by the investors.
Therefore, depending on the composition of a given ETF, an investor may be forced to file many tax returns to different states; a process that is both expensive and tedious.
Besides the state taxes for partnership ETFs, some commodities, such as metals, are taxed at a higher rate of 28% (as opposed to the 15% capital gain tax rate) since they are considered as collectibles.
Other tax implications include unexpected tax filing and expensive tax preparation costs.