Post Reply Question about Exchange Traded Funds
2047 cr points
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24 / M / USA
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Posted 8/14/15
So the holdings in the ETF you subscribe to appreciated in value and you want to redeem. The fund distributes you the securities instead of cash, hence no capital gain. But with those securities in hand, as they have appreciated in value and you want to convert to cash (by selling), don't you still get hit with a capital gains tax like you do in Mutual Funds? ETF's seem to have that extra step, but maybe with that in-kind process, you don't have to report your gains as often (Let's say you redeem and keep your shares for 5 years...)?


This is something that always confused me about the industry, but I'd like to be set straight.
37332 cr points
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36 / M / US
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Posted 8/14/15
Links are not my favorite way to help explain things, but and ETF needs more info.

http://www.investopedia.com/terms/e/etf.asp

On very basic terms its more like a stock instead of a mutual fund because it trades in common stock fluctuates during the day. Taxes on cash are within the fund so holding it doesn't generate capitol gains for you, at least until you sell.

So to answer your question I believe when you sell you have to be taxed on it like any other capitol gain, unless you have vehicles to offset the gain.

More info: https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

37144 cr points
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Posted 8/14/15
My understanding is that the benefit of an ETF over an MF is tax efficiency. With an ETF you typically only pay when you sell. With a MF you can be taxed before you even get anything out of it, so ETFs are seen as more tax efficient.

I'm just a layman though. You would have better luck asking this somewhere like Quora.
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