Democrats on the US Senate Finance Committee recently floated the idea of ending tax benefits for Exchange Traded Funds (ETFs).
According to a report by CNBC, Sen. Ron Wyden (D-OR) is working on a plan to create new taxes on ETFs as a way of paying for his party’s $3.5t budget package.
The proposal targets “in-kind” transactions between financial institutions which help regular investors avoid capital gains taxes on ETF investments.
No formal action is being considered on the proposal yet. The budget is currently in reconciliation.
ETFs offer both insitutiojnal and retail investors several advantages outside of owning shares of a company.
For starters, ETfs are pools of shares of companies that are similar in some way. There are ETFs for everything from renewable energy to technology and natural resource shares.
At the same time, ETFs offer several tax advantages. For example, there are fewer “taxable events” with ETFs when compared to mutual funds because ETFs don’t need to be re-balanced like other funds.
Similarly, dividends from ETFs are taxed based on the klegth of time an investor holds their shares. Investors who hold shares for 60 days or less can pay no taxes at all in some instances.
Bypass capital gains
Sen. Wyden told CNBC that the law is aimed at financial institutions who try to bypass capital gains taxes, not retail investors.
“This particular proposal simply applies the same rules already in place for corporations to regulated investment companies, so wealthy investors can no longer avoid all tax on their gains,” he said.
However, critics worry the proposal could have a ripple effect across the $6.8t US ETF industry.
Tom Quaadman, executive vice president of the US Chamber of Commerce, told The Hill that the proposal will limit how investors decide to use their funds.
“Shareholders often reinvest gains from buybacks into growing new businesses and creating jobs, which means that proposals to restrict or discourage buybacks would ultimately be detrimental to the US economy and American families at a time of economic uncertainty,” he said.