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Understand how exchange-traded funds (ETFs) are taxed and discover tax relief strategies to maximize your returns

Investing in exchange-traded funds (ETFs) is one of the most popular strategies for Americans building wealth. ETFs are praised for their tax efficiency, but when it comes to the IRS, even seemingly simple investments can trigger complicated tax issues.

Understanding how ETFs are taxed can help you make smarter decisions, avoid costly surprises, and find tax solutions to ease your financial burden.

Whether you’re new to ETFs or you’ve been investing for years, knowing the details of taxation can be a powerful form of tax relief—helping you keep more of your returns.

Here’s what you need to know about how ETFs are taxed in 2025.

Equity and Bond ETFs: Capital Gains and Dividends

Most ETFs you’ll encounter fall into two main categories: equity ETFs (which hold stocks) and bond ETFs (which hold fixed-income securities). Both of these investment types come with unique tax implications.

Capital Gains

ETFs are typically more tax-efficient than mutual funds because of their structure. ETF managers can avoid triggering taxable events when they rebalance holdings, which helps investors limit unexpected capital gains.

However, when you sell your ETF shares, you will owe capital gains tax depending on how long you’ve held the investment:

• Short-term (1 year or less): Taxed at your ordinary income rate (up to 37% federally)
• Long-term (over 1 year): Taxed at lower long-term capital gains rates (0%, 15%, or 20%, depending on your taxable income)

If your income exceeds $200,000 (or $250,000 for joint filers), you may also be subject to the 3.8% Net Investment Income Tax (NIIT) on those gains.

Dividends

Dividend-paying ETFs must distribute earnings to shareholders—often once or multiple times per year. These dividends can be classified as:

• Qualified Dividends (taxed at long-term capital gains rates)
• Nonqualified/Ordinary Dividends (taxed at your ordinary income rate)

Bond ETFs, on the other hand, distribute interest that’s taxed as ordinary income, adding to your potential tax bill. These income streams can be significant, making tax planning essential to avoid surprises.

Futures-Based ETFs: K-1 Forms and the 60/40 Rule

If you invest in ETFs focused on commodities or certain cryptocurrencies, you may be dealing with futures-based ETFs, which are taxed differently.

The Complexity of K-1 Forms

Many commodity ETFs are structured as limited partnerships and issue a Schedule K-1 instead of the more common Form 1099. K-1s tend to arrive late during tax season and can complicate your return.

Additionally, if you hold these investments in a tax-advantaged account like a traditional IRA, you could trigger unrelated business taxable income (UBTI)—creating unexpected tax obligations.

The 60/40 Rule

Gains from selling futures-based ETFs are treated using a 60/40 tax split:

• 60% taxed as long-term capital gains (up to 20%)
• 40% taxed as short-term capital gains (up to 37%)

Even if you’ve held the ETF for only a few days, this blended rate applies. While this can be beneficial for short-term investors, it can be a disadvantage for long-term investors expecting preferential rates on the full gain.

Precious Metals ETFs: The Collectibles Tax Rate

If you’re investing in ETFs backed by physical precious metals like gold or silver, be aware that the IRS taxes them differently.

These ETFs are typically treated as collectibles, meaning long-term gains are taxed at 28%, instead of the usual capital gains rates. Short-term gains on these assets are still taxed at your ordinary income rate.

Investors in these types of ETFs often look for tax solutions to help offset the higher rates, such as tax-loss harvesting or offsetting gains with losses from other investments.

Finding Tax Relief with ETFs

If you’re investing in ETFs as part of a long-term strategy, you don’t have to go it alone. Many U.S. taxpayers benefit from tax relief programs or strategies that help minimize overall liability:

• Harvesting capital losses to offset gains
• Using retirement accounts (IRAs or 401(k)s) to defer taxes
• Seeking professional tax help for complex ETF portfolios

Additionally, when managing investment-related tax issues, you can work with debt and tax relief companies like Mitigately to find custom tax solutions tailored to your financial situation.

Final Thoughts

ETFs may be tax-efficient by design, but that doesn’t mean they’re tax-free. Understanding the difference between equity ETFs, bond ETFs, futures-based ETFs, and precious metals ETFs is essential for smart financial planning.

By exploring tax relief options and proactively managing your investments, you can reduce your tax burden and keep more of your hard-earned money working for you.