7957 / How are ETFs taxed?

ETF shares represent undivided interests in the assets held by the fund. ETFs are “organized either as open-end investment companies or unit investment trusts.”¹ ETFs organized as unit investment trusts (see Q 7973) generally qualify for tax treatment as regulated investment companies (RICs) for tax purposes. For the treatment of dividends, see Q 7938.For the treatment of capital gain on the sale or exchange of exchange-traded shares, see Q 7949.For the treatment of capital gains and losses, see Q 702. See Q 7922 to Q 7935 for a discussion of the specific rules applicable to RICs.

Exchange-Traded Funds Invested in Metals. In a memorandum prepared by the Office of Chief Counsel of the IRS, which was made public only as the result of a court order, the IRS advised that the sale of an interest in an ETF that directly invests in metal (“physically-backed metal ETF”) is treated as the sale of a “collectible” (see Q 702), such that any gain from the sale of the interest is subject to the maximum capital gains rate of 28 percent (i.e., instead of the 20/15/0 percent capital gains rate (see Q 702)).² The Service reasoned that in the case of a physically-backed metal ETF that is treated as a trust, the investor is treated as owning an undivided beneficial interest in the collectible held by the trust. Accordingly, if the investor sells an interest in the ETF or the trust sells a portion of the collectible, the investor is treated as having sold all or a portion of his or her share of the collectible held by the trust, and any gain from the sale of the trust interest or sale of the collectible by the trust is treated as collectible gain and, therefore, is subject to the maximum capital gains rate of 28 percent. However, if a physically-backed metal ETF is not structured as a trust, or if the ETF does not directly invest in the metal, then the above rule does not apply. The Service cautions that the structure of each physically backed metal ETF should be considered to determine the tax consequences of an investment in that ETF.