ETF Education Center - FAQs
ETFs and Taxes
How are ETFs taxed?
ETFs are required to distribute dividends and capital gains to shareholders. This is usually done at the end of each year and these distributions can be caused by index rebalancing, diversification rules, or other factors. Also, anytime you sell your fund this could generate tax consequences. Consult your tax advisor for more specific info/advice.
Return To TopHow is dividend income from ETFs taxed?
ETFs, like mutual funds, are required to distribute dividends to shareholders. Dividends are taxable as income to the shareholder, unless you own the ETF in a retirement account.
The Tax Relief Reconciliation Act of 2003 reduced the maximum tax rate on dividends from 35% to 15% for most investors. The rule also applies to dividend distributions paid to ETF shareholders. The dividend income from REIT ETFs may not be subject to the lower tax rate, although the capital-gains component of dividend income applies under the lower tax. Consult your tax advisor for more specific info/advice.
Return To TopWhat are the tax advantages of ETFs?
Most ETFs are designed to track set benchmarks, which translates into fewer trades and lower portfolio turnover. This reduces the frequency of tax gain distributions. By comparison, actively managed portfolios generally have higher turnover, which can translate into untimely or more frequent tax distributions.
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