My latest (last?) story at WSJ is a primer on the tax issues affecting ETFs. For the most part, they are straight forward. Equity ETFs are as efficient (or slightly more so) than equity-indexed mutual funds.
Bond ETFs, especially with cash create/redeem during a year of rising bond prices, had some capital gains to distribute.
IndexUniverse put out two compendia on ETFs and taxes late last year. Truly yeoman’s work and incredibly helpful. Check out the complete guide to ETF Taxation as well as their summary of 2011 distributions.
Also, with the help of some folks at WisdomTree and Teucrium, I learned a little more about the nuances of futures-based commodity ETP taxation.
One of the WisdomTree funds I looked at —WisdomTree Brazil Real Fund— paid out a large distribution. According to the company, the fund has an August fiscal year end, at which point it had distributions to pay out (and paid those out in December.) Those distributions amounted to 29% of the NAV by December.
Another hitch for futures funds, realized gains (or losses) are marked to market for the individual investor at the close of the tax year at 60% long-term, 40% short-term and then used to increase/decrease the basis.
There’s no actual distribution from the fund, just a distribution of the tax liability.
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