Michael Johnston: ETFs have become so popular in recent years in part because of the tax efficiencies that they offer relative to traditional mutual funds. Due to the nuances of the creation / redemption mechanism, ETFs are generally able to give investors more control over their tax situation–instead of pinning them with capital gains obligations due to the activities of other investors.
Unfortunately, however, the tax treatment of exchange-traded products cannot be summed up simply as being more efficient than mutual funds. There are various complexities across the different product structures that impact the effective tax liabilities that will be incurred on gains. And there are also some nuances that impact how taxes on various ETP positions must be reported that are of major importance to some financial advisors. Gains and losses on the majority of exchange-traded products are reported on Form 1099, just like individual stocks. A select few among a universe of 1,400+ funds, however, issue a K-1 to investors that outlines their individual share in the profits and losses of what is technically a limited partnership. As we enter tax season and investors scramble to ready their returns, we outline the complete list of ETFs that issue a K-1 for anyone looking to avoid a more complex tax filing, or simply to educate those on who may be unaware of how their investment is treated from a tax perspective.