ETFs may lose key tax advantage

Tax advantage is the one of the main criteria that favours ETFs over mutual funds in comparisons, they pay a lot less. This might change with the recent proposal by US Senate Finance Committee Chairman Ron Wyden, who is working to end a tax loophole found in the ETF structural system.

The effort would address an advantage for ETFs that originates from a law that exempts regulated investment companies (RICS), from recognizing a taxable capital gain on assets if shareholders are paid out “in kind. In other words, when redeeming investors are paid out in securities instead of cash, triggering fewer capital-gain taxes.

According to the Joint Committee on Taxation, the measure is estimated to bring in $205 billion over a decade. If the proposal passes, it will take affect in tax years after year end 2022 and will entirely exempt retirement accounts.

Wyden's idea hasn't yet been officially recognized in a formal draft legislation, but the proposal got the attention of the big asset managers such as BlackRock, who expressed to the Wall Street Journal concerns that this proposal would be detrimental to long-term investors and retirement savers. They will review Sen. Wyden’s proposal to better understand how it will impact investors.

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