ETFs vs Mutual Funds

Oldman answered 2 years ago …

Mr. Diggz has a partially INCORRECT answer.

.ETFs will declare, via your 1099, any cap gains and dividends each period (Usually at yr. end, but for others when they change the composition of their baskets or creation units, perhaps quarterly or when the index they track changes ).

In addition, the tax on these gains cannot be deferred until the shares are sold (and this is true for Bond ETF's with monthly dividends, and even for TIPs ETFs). The losses can be deferred, until you sell the ETF.

What makes ETF's more tax-friendly than mutual funds, is that you can conrtrol the timing of sales and purchases, from daily to whenever, without regard to "Short-term Trading Restrictions on open-ended mutual funds". ETF's and Closed-end Funds, Grantor Trusts and Holders can be purchased and sold with the frequency of stocks; many are "optionable", and some can be "Marginable"...all trading advantages that don't exist with open-ended mutual funds.

But the taxation of their cap gains and dividends follows the same principles as those of other stocks and any funds ... when it's declared, you owe the tax for estimated tax purposes, and ...even if the distribution to you is delayed beyond the end of your tax year (usually, but not always, Dec. 31st) into the next year, the distribution is taxable in the year that the ETF or ... declared it on the 1099 you will receive from your brokerage.

In addition, some of the Powershares and other commodity-trading or hard asset holding ETFs (GLD, DBA, GSC, etc.) file a K-1 directly to you...not necessarily via the brokerage, because they follow Publicly Traded Partnership regulations...which require you, the limited partner, to file the shelter number and add the info to the 1040 Schedule D.