Instead, they're taxed as ordinary income, with a max rate of 39.6 percent … that's if they're taxable at all (more on that below).īond ETFs pay capital gains more often than stock ETFs. Though often called "dividends," these interest payments aren't considered qualified dividends by the IRS, meaning they don't get the lower, qualified dividends tax rate. Bond ETFs make regular (usually monthly) coupon payments to shareholders that interest is one of their biggest selling points. It also taxes any distributions you may have received from your bond ETF.īond ETF interest payments are taxed as ordinary income. The IRS doesn't just tax the profits you may have made from the sale of your bond ETF shares. Although unlikely, RISE may also generate Unrelated Business Taxable Income (UBTI) that could be taxable in nontaxable accounts, like an IRA.īond ETF Distributions Are Not Qualified Dividends.K-1s can be confusing and tedious for taxpayers not familiar with them. ("Marked to market" means that, for tax purposes, its futures contracts will be treated as if the ETF had sold them.) You may be on the hook for taxes on those gains, regardless of whether you sold your shares. RISE is considered a "pass-through" investment, meaning gains must be "marked to market" at the end of the year and passed on to investors.This comes out to a blended maximum capital gains rate of 27.84 percent. The remaining 40 percent are taxed at your ordinary income rate, no matter how long you held your shares. Sixty percent of any gains will be taxed at a long-term capital gains rate of 20 percent. There's one exception: the Sit Rising Rate ETF (RISE).This ETF uses futures contracts and options on Treasurys, which technically makes it a commodities pool. If you held them for less than one year, then they’re taxed as ordinary income, the max rate of which is 39.6 percent. If you hold your shares for more than a year, you can use the lower long-term capital gains tax rate of 20 percent. When you do, you owe capital gains tax on whatever profit you make. Either way, you aren’t taxed until you sell your shares. Almost all bond ETFs are open-ended ETFs, though 17 are exchange-traded notes. Open-ended bond ETFs and bond ETNs are taxed the same way - and it's likely the same as for any other ETF, mutual fund or stock you own. If a bond generates taxable income during the year-which most bonds do - then that income will be taxed. Bond ETFs hold bonds, obviously, and bond taxation is relatively straightforward. (See: " The Definitive Guide To 2015 ETF Taxation").
How an ETF is taxed depends on two things: what the fund holds, and how it is structured.
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