Profits you make from selling an exchange-traded fund (ETF) are taxable just like the profits f﷽rom selling a stock or withdrawing money from a mutual fund. Dividends received from an ETF arಌe taxable as well.

Overview: ETFs and Taxes

An ETF is a selection of investments that can include stocks, bonds, currencies, or commodities. Most ETFs select their investments to precisely mimic an index such as the S&P 500 or the Russell 2000 Index. This makes them "passively managed" and it's why the fees are so low. No buying and selling decisions have to be made from day to day. The performance tracks the index as closely as possible.

The tax implications for their investors are virtually the same as those for the investments that are included in the fund. The tax treatment is similar to that of the underlying asset: You owe the taxes if you make a profit.

Taxes From Sale of Stock ETF Shares

You're taxed for an ETF composed of stocks in the same way as you would be if you had sold those stocks.

• You'll pay 澳洲幸运5官方开奖结果体彩网:capital gains tax if you hold an equity ETF for more than a year and make a profit on its sale
• The profits are treated as 澳洲幸运5官方开奖结果体彩网:ordinary income if you hold it for one year or less. The tax will be the same as what you owe on your other income for the year based on your tax bracket. This is higher than the capital gains rate for many people.

The requiℱred taxes are usually simila⛦r but there are extenuating circumstances for certain types of ETFs and their dividends provided that they meet certain criteria.

Taxes on Commodity or Currency ETFs

You can expect different tax requirements for ETFs that invest in commodities, precious metals, or currencies because the tax rules for these underlying assets aren't the same as the rules for stocks.

Qualified vs. Unqualified Dividends

澳洲幸运5官方开奖结果体彩网:Qualified dividends are taxed at a lower capital gains tax rate than unqualified or ordinary dividends. Qualified dividends are taxed at 0% to 20% depending on the investor's tax bracket. The lower rate is applied to dividends that meet certain requirements put in place by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS):

• The dividend must be paid by a U.S. company or a qualifying foreign company.
• The dividends weren't previously excluded by the IRS as qualified dividends.
• The 澳洲幸运5官方开奖结果体彩网:holding period is met.

澳洲幸运5官方开奖结果体彩网:Unqualified dividends are taxed at the taxpayer's federal income tax rate. These rates range from 10% to 37% for the 2024 and 2025 tax years.

Most dividends fall into this category because they're considered unqualified by default. They only become qualified if the above criteria are pursued and met.

ETFs and Dividend Taxation

The stocks held by ETFs usually pay dividends quarterly or onc💖e a year. ETF holding bonds usually pay interest monthly. Make sure it pays qualified dividends if you’re investing in an ETF that holds stocks.

Qualified Dividends

You must hold an ETF for more than 60 days during a 121-day period to receive a qualified dividend. The period begins 60 days before the ex-dividend date and ends 60 days after that date. This is the last dꦯay when new owners can qualify for t🧜he next dividend.

The tax rates on qualified dividends are 0%, 15%, and 20%, depending on your filing status and your tax bracket. The dividends aren't taxed as qualified dividends, however, if you hold the stock for fewer than 60 days during that 121-day period.

You could pay 0% taxes on qualified ETF dividends if you're in one of the lower tax brackets. You would still pay tax when you sold the ETF itself but you wouldn't pay taxes as long as you satisfy the qualified dividend requirements for holding.

This threshold is $47,025 for 2024 and $48,350 for single taxpayers in 2025. You would pay no taxes on qualified dividends as long as your 澳洲幸运5官方开奖结果体彩网:modified adjusted gross income (MAGI) is below these levels. The next dividend rate is 15% for incomes between $47,025 and $518,900 in 2024. The thresholds increase to between $48,350 and $533,400 in 2025. Individuals who have incomes greater than this will pay a 20% tax on their qualified dividends.

Unqualified Dividends

Dividends will be taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income if you hold an ETF for less than 60 days. All dividend income is reported on 澳洲幸运5官方开奖结果体彩网:Form 1099-DIV.

This only applies to the dividend, however. All sales of ETFs in one year or less will result in a short-term capital gains tax. This is significantly higher for most taxpayers than the tax you would pay if you had held it for more than a year.

Individuals who are in the highest tax brackets will be required to pay an additional 3.8% 澳洲幸运5官方开奖结果体彩网:net investment income tax (NIIT). This threshold is $200,000 for single filers as of September 2024. It's $250,000 if you're married filing jointly and $125,000 if you're married and filing separately. The income amounts that trigger the NIIT are based on the filing person's MAGI.

Dividend ETFs

Some investorꦏs find thatꦦ having dividend-paying ETFs can add a solid core to their portfolios. It can offer tax advantages as well as provide a steady stream of income in the form of qualified dividends.

Let's take a look at two dividend-paying ETFs as of January 2024: The SPDR Portfolio S&P 500 High Dividend ETF (SPYD) and the Schwab U.S. Dividend Equity ETF (SCHD).

SPYD is one of the larger high-dividend ETFs on the market. It aims to track the High Dividend Index of the S&P 500. This index measures the 80 highest-dividend-yielding companies in the index. The ETF pays a healthy dividend which is derived from mostly 澳洲幸运5官方开奖结果体彩网:large-cap stocks in financials, utilities, and real estate.

SCHD tracks the total return of the Dow Jones U.S. Dividend 100 Index. It's similar to SPYD because it's a relatively straightforward, low-cost ETF that's designed to offer investors broad exposure while providing a quarterly dividend payment. This ETF's top three holdings out of 104 names are Abbvie, Merck, and Broadcom. The ETF is heavy in industrials, financials, and consumer staples.

The Bottom Line

Taxes on ETF dividends depend on whether they’re classified as qualified or unqualified. They'll be taxed at your normal income rate if they're unqualified. Qualified dividends are taxed between 0% and 20%.

Consider discussing an ETF dividend strategy with a qualified investment advisor or accountant if you aren't clear on the complexities involved in your income and tax brackets.