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Some Basic ETF Tax Clarity
by: Index Universe December 15, 2008 | about stocks: DBC / DJP / EU / GLD / GSG / IAU / JYF
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Jim Wiandt is right: We're not tax attorneys. But somebody has to speak plainly on taxes.

This is a pet peeve of mine, so I hope you'll indulge me. Tax law is complicated, and the application of tax law to individual situations is complicated as well. One investor may run afoul of the Alternative Minimum Tax; another might qualify as a "trader" and have any profits taxed as a business; others may have complicated tax havens set up on the Isle of Jersey.

But by and large, tax law has some hard and fast facts.

In this case, short-term capital gains distributed by a mutual fund company cannot be fully offset by individuals using short-term capital losses from elsewhere in their portfolio. Instead, those short-term capital gains are taxed as ordinary income.

This is just true.

But it's frighteningly hard to find this out. If it's included in prospectuses, it's buried in so much legalese that it's unintelligible to most investors. And often, prospectuses will simply hide behind the same disclaimer you stamped on your last blog: Consult your tax advisor.

Well, yes, consult your tax advisor. But investors also have a right to have basic tax information explained clearly to them, in prospectuses, in the media, and in other situations. That information may not apply to every investor, but it applies to most, and people that are too afraid of being sued to provide standard tax information in a clear fashion provide a disservice to investors.

So let's go through a few quirks of tax law as they apply to ETFs:

Gold bullion ETFs are taxed as "collectibles." That means that any and all long-term gains on funds like GLD and IAU are taxed at a 28% capital gains rate, rather than the 15% rate assigned to most investments.
Commodity futures ETFs are generally taxed as section 1256 contracts (at least, the futures parts), and all gains are marked-to-market at the end of each year. In English, this means that if you hold one of the popular commodity futures ETFs, like GSG or DBC, you will have to pay taxes at the end of the year on any gains (or losses) that the fund incurred while buying and selling futures each month. Those gains (losses) will be taxed as 60% long-term gains (or losses) and 40% short-term gains (or losses). That creates a blended 23% tax rate for investors in the top tax bracket. You cannot defer these gains. You will pay them whether or not you sell the fund.
Conversely, the tax treatment of exchange-traded notes that track commodity futures indexes is uncertain. You may be able to defer gains on these notes and only pay regular capital gains taxes when you sell, with no mark-to-market rule and the lower 15% capital gains tax rate. Then again, you may not: The Internal Revenue Service has been reviewing this situation for more than a year, and may decide that these gains should be taxed in the same way as comparable ETFs.
All the gains on most currency ETFs and ETNs are taxed as ordinary income, never as long-term capital gains. The exceptions to this rule include the WisdomTree Dreyfus Euro Fund (NYSEArca: EU) and the WisdomTree Dreyfus Japanese Yen Fund (NYSEArca: JYF), which are technically short-term bond funds and are taxed accordingly.
I can't tell you how many investors and advisors have tripped up on these rules over the past few years, and lost money as a result. A little bit of clarity by the media could have saved a lot of heartache.

But then again, don't take my word for it: Consult your tax advisor.
http://seekingalpha.com/article/110789-some-basic-etf-tax-clarity?source=yahoo