ETF Tax Headaches
July 6, 2011 at 11:54 AM ;)
What am I up to this week? Sitting tight on my cash position, and waiting for the market to fall back a bit more. Luckily, this gives me time to work on my taxes…
My taxes are quite complex because I am involved with a whole series of partnerships funds that do not need to send me a final tax statement until June 30.
Every April 15 I file an extension and try to get my tax returns done by October.
I am not alone among many investors who have to do this.
The biggest culprits in the Exchange Traded Find (ETF) world are commodity, currency and double or short market ETFs. They cause tax accounting headaches and it's not fair to small investors who are probably not used to paying big accounting bills.
Owning $2000 of a commodity ETF could add $350 to your accounting bill at the end of the year. The Wall Street Journal has a pretty good explanation here.
If you don't mind the tax prep hassles, these ETFs are still cheap ways to get exposure to commodities that might otherwise be difficult for a small investor.
That said, not all ETFs cause tax headaches. Equity index ETFs hold stocks, and thus act like stocks for tax purposes. A few of these equity ETFs include SPDR S&P 500 (SPY), PowerShares QQQ Trust (QQQ) and SPDR Select Financial Sector Fund (XLF).
DISCLOSURE: I own, SPY and am short XLF. I have traded QQQ, GLD and UUP over the past two years, but don't currently own any of these shares. I have never touched GASX or OILZ. In my old institutional trading days I have traded both of the derivative instruments they mimic (a bet on the slope of the discount or premium for future delivery of crude oil and short term natural gas delivery). They seem too complex for an ETF. Just read the names – yikes.
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ETFs is an easier way to invest in commodities, but they carry tax traps such as soaring tax preparation bills. So before you invest, ask your broker about its tax quirks. tax relief attorney