Exchange Traded Funds (ETF) can be great investment vehicles, letting you tailor your investment with more precision – and frequently with less expense – that mutual funds. Many can also reduce your tax bill.
However, these financial instruments which represent a basket of assets that trade like stocks, can take a bite out of you if you have not done your homework.
The Wall Street Journal’s Jason Zweig wrote in a recent The Intelligent Investor column about the tax traps in some of these ETFs.
He correctly notes that ETFs that invest in currencies and commodities (and there are more than 100 of them) are taxed at much higher rates than the 15 percent that dividends and long term capital gains you pay on stock gains.
The worst part, Zweig writes, is that you can be taxed on money you have not earned and may never earn.
Add another problem. Reporting your gains to the IRS is complicated.
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