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By Scott Burns | 09-16-2009 09:32 AM

ETF Investors: Don't Be Surprised at Tax Time

Uncle Sam has very nuanced rules for precious metal, derivative, and other ETF products.

Scott Burns: Your Tax ETF Questions Answered. Hi there, I'm Scott Burns, director of ETF Analysis with Morningstar. Today we're going to talk about some of the nuances of taxation issues in the ETF market.

Now, generally, ETFs are known for their tax efficiency, and that is that they have a creation-redemption process that really keeps them from having shadow capital gains distributions like you see in mutual funds. But, that's not the end of the story.

For most ETFs, when we think about ETFs that own a stock, or a bond, or even commodities, the general rule of thumb is that the IRS is going to look through the ETF structure and tax the fund just like it would tax the underlie.

So, if you look at an ETF like the SPDRs, which tracks the S&P 500, that owns 500 stocks, and it will be taxed as if you own those 500 stocks. So, any dividends you receive from that will be taxed as stock dividends, and any capital gains, long-term or short-term, you incur will be taxed as long-term or short-term capital gains.

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