By Jim Wiandt, ETFzone Staff
Saturday, January 6, 2001
For all the talk that ETFs are more tax-efficient, there's rarely a detailed explanation of exactly why this is so. As a result, many investors do not truly understand the tax benefits and liabilities of ETFs. It's important to emphasize that ETFs are not a magic potion that will lay Uncle Sam to rest in a field of poppies. There are tax consequences to investing in ETFs, both for the fund and for the individual.
Saturday, January 6, 2001
For all the talk that ETFs are more tax-efficient, there's rarely a detailed explanation of exactly why this is so. As a result, many investors do not truly understand the tax benefits and liabilities of ETFs. It's important to emphasize that ETFs are not a magic potion that will lay Uncle Sam to rest in a field of poppies. There are tax consequences to investing in ETFs, both for the fund and for the individual.
Essentially, for an investor who buys and sells individual ETF shares, the tax consequences are identical to those he would suffer in buying and selling ordinary stock. If you sell less than a year after you buy, the gain in price of the ETF shares will be taxed as ordinary income. When you sell after more than a year, you'll be taxed at a lower capital gains rate (10 percent or 20 percent currently, depending on your tax bracket). If the fund loses value, you can write off the loss against other capital gains (and up to $3000 annually of ordinary income) when you sell.
The simplest way to look at the tax benefits of ETFs is to regard them as a trade. Where ETFs often have nontaxable trades of ETF shares for underlying stock and vice versa, traditional mutual funds generally have sales events, which trigger tax consequences.
Because most ETFs are mutual funds, you are also subject to many of the tax liabilities that apply to mutual funds. That is, when a fund is forced to sell stock to change its composition, for example, when an index rebalances, the fundholders have to pay capital gains on whatever the gain was of the stock that is sold. Here's where it gets tricky, though. ETFs have the potential to make that gain smaller than it might be in a traditional mutual fund. How? Simple. Because ETFs are created and redeemed with stock that is traded in-kind, it is possible to raise the overall cost-basis of the stock that underlies the fund. Whenever a basket of stock is redeemed, the fund gives the redeemer the lowest cost-basis underlying stock. It doesn't matter to the redeemer. He pays based on his individual cost-basis regardless. The net result is that the fund is holding higher cost-basis stock, making the exposure to capital gains less when a particular stock must be sold in rebalancing.
Traditional open-ended mutual funds operate in the opposite manner. When redemptions come in, they sell off their higher cost-basis stock to lower immediate gains, leaving the fund exposed to ever-widening capital gains. This leads us to the other, more widely understood, tax advantage of ETFs. They are not exposed to capital gains that result after redemptions, as traditional mutual funds are. With a traditional mutual fund, when an investor cashes in his or her investment, the fund is often forced to sell underlying stock to pay him or her cash. This results in capital gains to the fund that must be picked up by all shareholders. ETF investors are never subject to this, because nothing in the underlying portfolio changes when an investor buys or sells individual ETF shares. And when an Authorized Participant does redeem ETF shares, it is actually to the collective benefit of the remaining shareholders. ... ETFzone: ETF Tax Efficiency
The simplest way to look at the tax benefits of ETFs is to regard them as a trade. Where ETFs often have nontaxable trades of ETF shares for underlying stock and vice versa, traditional mutual funds generally have sales events, which trigger tax consequences.
Because most ETFs are mutual funds, you are also subject to many of the tax liabilities that apply to mutual funds. That is, when a fund is forced to sell stock to change its composition, for example, when an index rebalances, the fundholders have to pay capital gains on whatever the gain was of the stock that is sold. Here's where it gets tricky, though. ETFs have the potential to make that gain smaller than it might be in a traditional mutual fund. How? Simple. Because ETFs are created and redeemed with stock that is traded in-kind, it is possible to raise the overall cost-basis of the stock that underlies the fund. Whenever a basket of stock is redeemed, the fund gives the redeemer the lowest cost-basis underlying stock. It doesn't matter to the redeemer. He pays based on his individual cost-basis regardless. The net result is that the fund is holding higher cost-basis stock, making the exposure to capital gains less when a particular stock must be sold in rebalancing.
Traditional open-ended mutual funds operate in the opposite manner. When redemptions come in, they sell off their higher cost-basis stock to lower immediate gains, leaving the fund exposed to ever-widening capital gains. This leads us to the other, more widely understood, tax advantage of ETFs. They are not exposed to capital gains that result after redemptions, as traditional mutual funds are. With a traditional mutual fund, when an investor cashes in his or her investment, the fund is often forced to sell underlying stock to pay him or her cash. This results in capital gains to the fund that must be picked up by all shareholders. ETF investors are never subject to this, because nothing in the underlying portfolio changes when an investor buys or sells individual ETF shares. And when an Authorized Participant does redeem ETF shares, it is actually to the collective benefit of the remaining shareholders. ... ETFzone: ETF Tax Efficiency
글
댓글 없음:
댓글 쓰기