How are ETFs taxed?

 

Most ETFs are structured the same as mutual funds for legal and tax purposes; hence, the same tax rules apply to ETFs and traditional funds in these cases. Investors pay taxes on dividends and capital gains distributions during the life of the investment, and when they sell the ETF, they owe taxes on any gain realized (or they can use a loss to offset other gains).

When a market maker or specialist redeems shares in an ETF, it will receive a basket of securities in exchange. U.S. tax law allows such in-kind redemptions to not cause the ETF to realize capital gains or losses on the distributed securities. Thus, the redemption process provides an opportunity to remove low-cost basis securities from the portfolio and thereby reduce or eliminate capital gains distributions to shareholders.

All investing is subject to risk, including possible loss of principal.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

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