ETF Tax Basics - Fidelity (2024)

FAQs

What is the tax loophole of an ETF? ›

Thanks to the tax treatment of in-kind redemptions, ETFs typically record no gains at all. That means the tax hit from winning stock bets is postponed until the investor sells the ETF, a perk holders of mutual funds, hedge funds and individual brokerage accounts don't typically enjoy.

If you sell an equity or bond ETF, any gains will be taxed based on how long you owned it and your income. For ETFs held more than a year, you'll owe long-term capital gains taxes at a rate up to 23.8%, once you include the 3.8% Net Investment Income Tax (NIIT) on high earners.

For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.

The largest Fidelity ETF is the Fidelity MSCI Information Technology Index ETF FTEC with $10.89B in assets. In the last trailing year, the best-performing Fidelity ETF was FDIG at 76.06%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Some investment-related items can't be claimed as a tax deduction, including: Commissions paid on the trading of stocks and ETFs[3] Transaction fees to purchase and sell investments. Fees paid for general financial counselling or planning.

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

You still pay tax on accumulating ETFs

You owe the same amount of tax on income regardless of whether you choose the distributing or accumulating route. To recap: You owe nothing if your investments are completely sheltered within SIPPs or ISAs.

Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.

Section 1256 contracts get special tax treatment of 60/40. This means that positions held for any amount of time will receive 60% long-term capital gains treatment and 40% short-term capital gains treatment.

Do Fidelity ETFs pay dividends? ›

If you own shares of an exchange-traded fund (ETF), you may receive distributions in the form of dividends. These may be paid monthly or at some other interval, depending on the ETF.

Because U.S. Treasurys are tax-free at the state and local level, interest payments from sovereign bond ETFs that hold U.S. Treasurys are also exempt from state and local income taxes. They are subject to federal taxes, however. Interest payments from overseas bond ETFs are taxed as ordinary income.

$0.00 commission applies to online U.S. equity trades, exchange-traded funds (ETFs) and options (+ $ 0.65 per contract fee) in a Fidelity retail account only for Fidelity Brokerage Services LLC retail clients.

As most ETFs now trade commission-free and can be bought and sold multiple times throughout the day, they are less likely to be used as buy-and-hold vehicles. Because of his cautionary tone, Ramsey sometimes gets painted with the “anti-ETF” brush. But to be clear, Ramsey's all in favor of using ETFs when used properly.

Compare Costs

Overall, you might save money at Fidelity if you trade options, but Vanguard will be cheaper if mutual funds are your focus. The key difference is that Fidelity is low-cost for a wide range of investor types, while Vanguard is a great low-cost solution aimed primarily at buy-and-hold investors.

ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.

Tax loss rules

These capital losses can be used to offset capital gains (from any investments, not just ETFs) and up to $3,000 of ordinary income ($1,500 for married persons filing separately). Capital losses in excess of these limits can be carried forward and used in future years.

High-yield municipal bond ETFs offer tax-exempt yields to investors in diversified portfolios that mitigate some of the debt instruments' risk. Munis can provide tax-free income at the federal, state, and municipal levels.

Unlike dividends or interest income, return of capital is not considered income, and is not immediately taxable. Instead, it reduces the investor's cost basis in the ETF, which can potentially reduce the amount of capital gains tax owed when the investor sells their shares.