Reading 2021-11-01


Notes from reading

When you sell an ETF, the trade triggers a taxable event. Whether it is a long-term or short-term capital gain or loss depends on how long the ETF was held.

Dividends and interest payments from ETFs are taxed similarly to income from the underlying stocks or bonds inside them. The income needs to be reported on your 1099 statement. If you earn a profit by selling an ETF, they are taxed like the underlying stocks or bonds as well.

ETFs held for more than a year are taxed at the long-term capital gains rates, which goes up to 20%. Individuals with substantial income from investing may also pay an additional 3.8% Net Investment Income Tax (NIIT).

ETFs held for less than a year are taxed at ordinary income rates, with the top end of that range at 37%, plus an additional 3.8% NIIT for some investors.

As with stocks, with ETFs, you are subject to the wash-sale rules if you sell an ETF for a loss and then buy it back within 30 days.

Many ETFs generate dividends from the stocks they hold. Ordinary (taxable) dividends are the most common type of distribution from a corporation. According to the IRS, you can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation tells you otherwise. These dividends are taxed when paid by the ETF.

Qualified dividends are subject to the same maximum tax rate that applies to net capital gains. Your ETF provider should tell you whether the dividends that have been paid are ordinary or qualified.

Exceptions: ETFs that invest in currencies, metals, and futures do not follow the general tax rules. Rather, as a general rule, they follow the tax rules of the underlying asset, which usually results in short-term gain tax treatment.

In case of ETFs and stocks, the realized gains from selling assets in portfolio will be

  • capital gains from selling a stock or ETF
  • dividends paid to shareholders of a company
  • interest income received from fixed income products (bond)

The difference between any realized gains (before taxes are applied) and trade commissions or fees is the Net Investment Income (NII)

Possible tax liability for an ETF

  • tax on capital gains
  • tax on distributions (ie. dividends, interest earned)