In writing about ETFs, as I’ve done recently, I don’t want to create the impression that all ETFs are worth considering. Some ETFs pose problems that aren’t easy to spot.In fact, many traders holding one of the most popular ETFs could face a nasty surprise in the next few months.SPDR Gold Shares (GLD) owns $59 billion worth of gold bullion. It offers a convenient way to buy and hold gold. But there’s a catch, even for buy-and-hold investors.There are tax issues with GLD for all shareholders that have to be addressed every year.Today I want to highlight some of the unusual tax issues that arise when holding certain ETFs, and offer a simple way of sidestepping them to save yourself a headache come tax time…
This ETF Makes Taxes a Nightmare…
I need to point out that I am not a tax accountant, and you should always consult with your tax adviser when reviewing questions about taxes.That said, I do know the IRS treats GLD just like gold coins or other tangible gold investments. Gains or losses on shares held for a year or more are taxed as ordinary income rather than the more favorable capital gains rate. Short-term gains on positions held for less than a year are always taxed as personal income.The higher taxes on GLD can hurt, but there’s potentially even more pain awaiting you at tax time.Shareholders are assigned a proportional share of expenses and gains the fund reports. The fund managers incur expenses that do need to be paid by the investors. To pay those expenses, the managers may sell some gold.If those sales to cover expenses resulted in a gain for the fund, it’s possible you could owe taxes even if you sold your shares at a loss. That’s unlikely, but it’s possible. And to determine if you owe taxes, you will need to do a lot of work.If you own GLD, you’re responsible for tracking down that information and reporting it on your taxes. The fund sponsor makes the information readily available and shows examples of how to do the required calculations. But even with the data, it’s not an easy task to calculate your tax bill.
The burden associated with GLD isn’t unique to that fund. Any ETF owning physical gold like GLD does is treated the same way at tax time.
To avoid this, you might think you can buy a fund that gains exposure to gold through derivatives like futures contracts. You can avoid this particular tax issue that way. But with a fund like ProShares Ultra Gold (UGL), other tax issues quickly arise.UGL is treated as a partnership for tax purposes. That means you will still be allocated a portion of the expenses and income from sale. This will be reported to you on a Schedule K-1. That requires completing additional tax forms and usually involves additional expenses since the forms aren’t included in free tax filing software. Reporting gains and losses when you sell these funds also requires completing complex calculations.The K-1 is associated with any ETF that uses derivatives like leveraged funds or many funds offering exposure to commodities.Of course, these aren’t insurmountable problems. They are just a little more work at tax time. I’m in favor of avoiding things that cost me time and money in tax season, so I avoid ETFs with K-1s or other unusual tax forms.This doesn’t limit my portfolio. There are always other ways to get the exposure I want without complicating taxes.For example, gold miners — which you can trade through the VanEck Gold Miners ETF (GDX) — are generally a suitable alternative to the metal. And this ETF doesn’t have any unusual tax implications.But options on the ETFs are also generally a suitable alternative. And options, no matter what ETF you trade them on, are taxed just like stocks at the same rates as capital gains, with the same forms as stocks.For many individual traders, options might just be the best bet.Regards,
Chart of the Day:I’m Not Convinced by This Shakeout
(Click here to view larger image.)
Well, well, look who’s back to the bottom of the range once again!While small-cap investors might have completely given up at this point, small-cap traders are looking at a great opportunity today.The iShares Russell 2000 ETF (IWM) is testing the bottom of its long-term horizontal channel. Futures are pointing for it to open just a few cents above support. Not great.But we’re also seeing a major bullish RSI divergence playing out on the daily chart. We’re far less oversold at this same level than we were just a couple weeks ago.Stocks, crypto… everything feels highly perilous right now. Omicron is spreading fast and the Fed’s suggestion of raising rates on Wednesday seems to be sinking in. Honestly, that big pop that we saw on Wednesday seems more to be a product of unwinding short positions than it was actual bullish interest.But this chart, more than any other really, has me feeling like we’ll still get this year’s Santa Claus rally.Regards,
