James McGowan, senior ETF product manager for J.P. Morgan, noted there are potential tax risks with certain ETFs. For example, futures-based ETFs are treated like a partnership and require an IRS K-1 form. Capital gains are taxed at 40% short-term and 60% long-term rates. Commodity ETFs are taxed as grantor trusts and their tax rate can be as high as a 28%.
And beware of closure risk-more than 100 ETFs have closed since 1993, and 50 closed last year alone. Closures can force a client to realize unexpected, and potentially large, taxable events.
-Alan Lavine and Gail Liberman