Exchange-traded funds (ETFs) are popular. Very popular. In 2020, a whopping $507.4 billion flowed into U.S.-listed ETFs, 55% more than the $326.3 billion...
In 2020, a whopping $507.4 billion flowed into U.S.-listed ETFs, 55% more than the $326.3 billion that flowed in during 2019. At the end of 2020, net assets held by ETFs in the U.S. totaled $5.449 trillion.
Buy or sell an entire portfolio in a single transaction In some ways, ETFs are similar to mutual funds, but they also have differences — most of which are beneficial. Like mutual funds, ETFs offer investors an easy way to invest in portfolios that track the performance of specific stock indexes, industries, or geographic sectors. As such, they give investors the opportunity to buy or sell an entire portfolio in a single transaction.
Tax treatment of ETF dividends ETFs that hold dividend-paying stocks pay out those dividends, often quarterly. Dividends designated by an ETF as qualified dividends are taxed at the same federal rates as net long-term capital gains: currently 0%, 15%, or 20% depending on your income level. Dividends designated by the ETF as nonqualified dividends are taxed at higher ordinary income rates. While qualified dividends from an ETF are taxed at the same federal rates as long-term capital gains, you cannot offset them with capital losses. At higher income levels, nonqualified dividends can be hit with the 3.8% NIIT on top of the “regular” federal income tax hit.
Warning: Starting in 2022, the proposed Biden tax plan would raise the top federal income-tax rate on net short-term capital gains recognized by individuals back to 39.6%, the top rate that was in effect before the Tax Cuts and Jobs Act lowered it to the current 37%. This proposed rate increase would affect singles with taxable income above $452,700, married joint-filing couples with taxable income above $509,300, and head of households with taxable income above $481,000. After tacking on the 3.
Tax treatment of ETF losses Losses from selling garden-variety ETF shares are treated as capital losses. You can deduct capital losses against: capital gains from other sources and/or up to $3,000 of ordinary income from salary, self-employment, interest, and so forth . Any remaining capital losses are carried forward to the following tax year and are subject to the same rules in that year.
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