According to news sources, Exchange-traded funds have become increasingly popular thanks to their tax exemptions, but this could all change soon. Senate Finance Committee Chairman Ron Wyden, D-Ore., is proposing to close tax exemption on ETFs where investors are being paid with securities instead of cash.
Exchange-traded funds, or ETFs, are a basket of securities with shares that can be bought and sold on a stock exchange. As such ETFs allow funds to pay investors with the securities instead of cash in order to minimize taxable capital gains after unloading their profitable assets.
This process of exchanging these assets is commonly referred to in-kind trades and don’t typically involve cash.
Wyden has proposed to tax these transactions in order to stop institutions from using ETFs to avoid paying capital gains taxes. More specifically, Wyden is targeting the wealthiest investors who are using ETFs as a loophole. He claims that certain loopholes have allowed the rich to “pick and choose when, and whether, to pay tax” on their investments. The proposed plan does not apply to ETFs in tax-deferred retirement plans or retirement accounts. For example, those using 401(k) plans will not be affected by this change.
However, Wyden’s proposal has been met with some backlash from the ETF industry as this may hurt smaller investors by penalizing them with taxes.
The Investment Company Institute expressed its disapproval with this proposal as it would negatively affect Main Street investors. According to Investment Company Institute President Eric Pan, this draft legislation will severely harm smaller traders that use ETFs and rely on in-kind trades frequently.
Wyden’s proposal is estimated to raise $200 billion over the next decade. The added taxes are said to help fund the $3.5 trillion budget package set by the Democratic congressional leaders.
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