Results 1 to 5 of 5

Thread: Commodity ETF Tax Pitfalls

  1. #1
    alevin Guest
    AutoTracker

    Default Commodity ETF Tax Pitfalls

    Hey all, I read this in another forum this morning. Makes me wonder what kind of tax liability I'm going to get hit with from my DBC (which I'm still holding) as well as my short-term fliers in GLD, USO, DBO, DDG this past year. The other forum is huge, I didn't want to lose track of where I saw it so I copied from http://tickerforum.org/cgi-ticker/akcs-www?post=118310

    Warning: You May Not be Making as Much on Gold as You Think
    By Keith Fitz-Gerald
    Chief Investment Strategist
    Money Morning/The Money Map Report

    Millions of investors who bought gold in the last 12 months are undoubtedly very happy at the moment – considering that the yellow metal has risen 60% since last November to a recent close of $1,138.60 an ounce on Monday.

    But chances are good that many won’t be smiling when they discover just what the taxman has planned for their gains.

    Unbeknownst to most investors, gold is considered a collectible not a capital asset. In plain English, this means that despite the fact that many people believe they are investing in gold, the Internal Revenue Service (IRS) believes that they are collecting it.

    This is no small distinction and hurts investors because it means that gold does not qualify for the 15% maximum tax bite that most of us employ as a matter of routine when we mentally calculate profits earned on investments held for more than a year. That 15% cut for Uncle Sam is the long-term capital gains tax rate that applies to most stock or mutual fund investments.

    Precious metals are a completely different story. Profits from these “investments” can be subject to a 28% maximum tax rate if held for more than 12 months. And if they are sold in less than a year, the profits count as ordinary income.

    The long and the short of it “is that as a result of gold’s spectacular run-up, many investors may have a tax problem they haven’t counted on when they go to sell,” said Gary E. Ham Jr., of the Oregon-based accounting firm of Jones & Ham PC

    This may be especially true for investors who have piled into such asset-backed, exchange-traded funds (ETFs) as the SPDR Gold Trust (NYSE: GLD), the iShares Silver Trust (NYSE: SLV) and the iShares COMEX Gold Trust (NYSE: IAU), for example, because precious-metals ETFs are set up as something called a “grantor trust.” According to Barron’s, ETF investors are treated as owning undivided interests in the actual metal that’s owned by the fund. Therefore, when an investor sells shares in the ETF, the tax code treats that investor as having sold a share of the metal backing the fund.

    Adding insult to injury, if the ETF sells some of its hard assets to pay expenses or management fees – as many have done recently, the resultant gains (or losses) flow directly through to investors and shareholders even if those investors don’t receive any distribution or cash whatsoever.

    And the net results can be mighty startling. For example, Doug Fabian, president of Fabian Wealth Strategies, a California-based investment advisor, noted several painful examples in an article on his firm’s Web site about the tax traps of commodity ETFs, including:

    An investor who experienced a trading loss of $741 in the United States Oil Fund LP (NYSE: USO) – with no interest received – but a K-1 tax form reporting a taxable profit of $9,136 and interest of $210.
    Another who had actual trading profits in the United States Natural Gas Fund LP (NYSE: UNG) of $1,900, with no interest received, and a K-1 reporting taxable profits of $4,319 and $120 in interest.
    An investor who had an enviable trading profit of $4,335 in the PowerShares DB Agriculture (NYSE: DBA), without receiving any interest – activity that triggered a K-1 form that reported profits of $6,963 and interest of $207.
    Finally, an investor who notched trading profits of $337 and no interest in the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) triggered a K-1 listing profits of $3,406 and interest of $195.
    K-1’s, in case you are not familiar with them, are tax forms used by partnerships, corporations and ETFs to report a partner or a shareholder’s share of distributed profits and income. If you own one of the ETFs I’ve just mentioned, chances are you’ll be getting one just after the New Year to file with your taxes.

    Here’s how this works.

    Because the XYZ ETF does not pay income taxes itself, its profits are passed through to the actual owners – in this case, the shareholders, who must claim those profits as their own. If you own 50% of XYZ ETF, and XYZ files for a $100,000 profit in 2009, you’ll receive a K-1 for 50% of the net profits – or $50,000 – which you then will have to claim on your personal 2009 income-tax return.

    By the way, conventional gold and metals stocks – gold producers are a good potential example of what we mean – are treated “normally,” so investors who have chosen to buy these more-traditional investment vehicles will escape these “unexpected” tax consequences.
    K-1's also are doled out for Master Limited Partnerships like the ones I have invested in this year-ATN (oil and gas) and WMB (nat gas pipeline) for their dividends. ATN did quite well, WMB much more recent and borderline performance after all the earlier runup. Fortunately for me, I held/hold them in my Roth account, otherwise there might be unpleasant tax bills from them as well. Another good reason to have an emergency cash stash. Eeesh. Know what you're getting into-another good rule of thumb for investors/traders.


  2.  
  3. #2
    alevin Guest
    AutoTracker

    Default Re: Commodity ETF Tax Pitfalls

    OK, OK, I'm still learning. shoulda kept reading the thread I got the above information from. Here's some more tidbits I gleaned from there....

    K1 "distributions" are added to your cost basis if (and only if) they are RETURN OF CAPITAL. If added to your cost basis, they reduce your taxable gains when you sell. If distributions are tagged as interest income they should be taxable.

    GLD and SLV are safe from taxes if held in Roth/IRA accounts. For taxable accounts, CEF or GTU is PM possibilities (go Lady!), which IRS treats differently...if you have 16 hours to fill out the form and an accountant that knows what a PFIC is.
    Personally I have no idea what form the last commenter is talking about, don't have an accountant and no clue what a PFIC is, so I should probably stay away from CEF and GTU in my taxable account.

  4.  
  5. #3

    Join Date
    Dec 2007
    Posts
    906

    Default Re: Commodity ETF Tax Pitfalls

    Good idea for a thread alevin. Nice work!
    -- Tom | My Trades

  6.  
  7. #4

    Join Date
    Jan 2009
    Location
    Upstate NY
    Posts
    142

    Default Re: Commodity ETF Tax Pitfalls

    Hey Alevie.

    Basically if you buy an ETF that tracks a commodity: DBA, USO, UNG, GLD, SLV, etc., you'll pay a tax rate of around 35% if you sell within 12 months. 'LT cap gains' over a year and a day are at 28%. However, you may pay taxes on the futures contracts at the start of the new year whether you sell or not.

    Morningstar is more reputable than most bloggers. http://news.morningstar.com/articlen...aspx?id=303615

    Currency ETF's are taxed at your income tax rate no matter when you sell so that could be up to 35%.

    ETN's on the other hand are taxed at the 15% LT Cap Gains rate when held for one year and a day and 35% for ST Cap Gains.
    http://www.indexuniverse.com/blog/2783.html
    "Don't let your highs get too high and don't let your lows get too low." Bullitt’s Market Blog

  8.  
  9. #5
    alevin Guest
    AutoTracker

    Default Re: Commodity ETF Tax Pitfalls

    More information is better, thanks Bullitt. I didn't see anything in the Morningstar article that contradicted what I posted above, but added to it, certainly. I've avoided ETNs completely so far, but the ETN tax info in the Morningstar article is valuable for those that are brave enough to venture into them. Again, good idea to understand all facets of what you're investing/trading in, ahead of time.

  10.  

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •