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ETFs 112: What to Know about Exchange-Traded Notes

Introduction to What to Know about Exchange-Traded Notes Overview of Exchange-Traded Notes Premiums and Discounts of Exchange-Traded Notes Taxation of Exchange-Traded Notes Risks, Upsides and Downsides of Exchange-Traded Notes Summary of What to Know about Exchange-Traded Notes
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Taxation of Exchange-Traded Notes

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Taxation of Exchange-Traded Notes

Here is a summary of taxation rules regarding ETNs (other than currency-tracking funds):

Things To Know

  • Distributions, though rare, are taxed at ordinary income rates.
  1. ETNs hold no real assets; they are promissory notes.
  2. Distributions, though rare, are taxed at ordinary income rates.
  3. Your capital gains will be taxed only upon sale.
  4. Short-term capital gains apply when held less than one year.
  5. Long-term capital gains rates apply when held more than a year.

Currency-tracking ETNs have some different rules

Currency-tracking ETNs are a special case, as the IRS has ruled that they should receive the same tax treatment as other vehicles that offer exposure to single currencies. So, holders of currency ETNs will be taxed at (higher) ordinary income rates for both income and capital gains and are not eligible for the (lower) long-term capital gains rates for investments held for more than one year. Also, investors will have to pay the tax annually, even if they continue to hold the investment. While the ruling applies only to currency ETNs, if the IRS were to ever expand the ruling to all ETNs, the investments would lose one of their main advantages.