The Exchange-Traded Funds Manual, Second Edition

CHAPTER 4

Taxation of ETFs and Their Shareholders

This chapter looks at the tax treatment of exchange-traded funds and other exchange-traded instruments, with special emphasis on the investment companies that make up the largest segment of exchange-traded financial products. The special tax characteristics of grantor trusts, securitized commodity funds, and open-end exchange-traded notes are also described. Although this chapter is the principal discussion of taxation in the book, tax issues inevitably crop up in a number of other chapters. My emphasis in this chapter is heavily on federal U.S. taxation because the U.S. is the tax jurisdiction I know best. Chapter 11’s discussion of ETFs for investors outside the United States has some general comments on taxes in other markets. The standard disclaimer that I am not in the business of offering tax advice or qualified to offer such advice is fully applicable. In some cases there is not universal agreement on the appropriate tax treatment in a particular situation. I try to describe any controversies, but investors should obtain any necessary tax advice from their tax advisors—even if I fail to suggest a controversy. Bear in mind that any effort to summarize the tax treatment of investment companies inevitably simplifies things.

TAXATION OF INVESTMENT COMPANIES: SUBCHAPTER M AND REGULATED INVESTMENT COMPANY (RIC) REQUIREMENTS

This section covers key provisions of regulated investment company taxation under Subchapter M of the ...