FAQs
Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.
Are ETFs and mutual funds taxed the same way? ›
The Bottom Line
ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.
How are you taxed on mutual funds? ›
Like income from the sale of any other investment, if you have owned the mutual fund shares for a year or more, any profit or loss generated by the sale of those shares is taxed as long-term capital gains. Otherwise, it is considered ordinary income.
How much tax do you pay on ETF gains? ›
As a collectible, if your gain is short-term, then it is taxed as ordinary income. If your gain is earned for more than one year, then you are taxed at a capital gains rate of up to 28%.
What is the tax loophole of an ETF? ›
Thanks to the tax treatment of in-kind redemptions, ETFs typically record no gains at all. That means the tax hit from winning stock bets is postponed until the investor sells the ETF, a perk holders of mutual funds, hedge funds and individual brokerage accounts don't typically enjoy.
What are three disadvantages to owning an ETF over a mutual fund? ›
Disadvantages of ETFs
- Trading fees. Although ETFs are generally cheaper than other lower-risk investment options (such as mutual funds) they are not free. ...
- Operating expenses. ...
- Low trading volume. ...
- Tracking errors. ...
- The possibility of less diversification. ...
- Hidden risks. ...
- Lack of liquidity. ...
- Capital gains distributions.
Is it better to own ETF or mutual fund? ›
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
Can I move money from one mutual fund to another without paying taxes? ›
If you move between mutual funds at the same company, it may not feel like you received your money back and then reinvested it; however, the transactions are treated like any other sales and purchases, and so you must report them and pay taxes on any gains.
How long should you hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
How do I avoid capital gains tax? ›
Use tax-advantaged accounts
Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes at all on the assets in the account. You'll just pay income taxes when you withdraw money from the account.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
What ETFs are tax free? ›
- Fidelity Municipal Bond Index Fund (FMBIX)
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Vanguard Short-Term Tax-Exempt Bond ETF (VTES)
- Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
- iShares New York Muni Bond ETF (NYF)
- iShares California Muni Bond ETF (CMF)
- iShares National Muni Bond ETF (MUB)
Does ETF count as income? ›
ETFs are treated the same as conventional open-end mutual funds for tax purposes. Investors generally pay taxes on income and capital gains distributions during the life of the investment, as well as on any capital gains generated on the sale of their ETF units.
Do ETFs pay more than mutual funds? ›
ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often.
Can I convert a mutual fund to an ETF without paying taxes? ›
The conversion itself is tax-free to the investor and switches from actively managed mutual funds, which aim to outperform the market. The primary benefit of the new ETF is more tax efficiency. “That's a big selling point,” Sotiroff said.
Why do ETFs not pay capital gains? ›
Why? For starters, because they're index funds, most ETFs have very little turnover, and thus amass far fewer capital gains than an actively managed mutual fund would. But they're also more tax efficient than index mutual funds, thanks to the magic of how new ETF shares are created and redeemed.
Are ETF expenses higher than mutual funds? ›
ETFs expense ratios generally are lower than mutual funds, particularly when compared to actively managed mutual funds that invest a good deal in research to find the best investments.