Help - etf and tax forms

[ZaNoob]

There was an article here that warned about ETFs and getting a tax bill. What it basically amounted to was that you ended up being assigned a contract when you bought the ETF. Even if sell early or at a loss the contract might still sell at a profit. You end up having to pay for this profit even if you never got the gain.

Anyway I read that post on the boards but I've been scouring and can't find it. Any information about this tax would be helpful. Or even better the link to it. Thanks.

[simpletradesnet]

There was an article here that warned about ETFs and getting a tax bill. What it basically amounted to was that you ended up being assigned a contract when you bought the ETF. Even if sell early or at a loss the contract might still sell at a profit. You end up having to pay for this profit even if you never got the gain.

Anyway I read that post on the boards but I've been scouring and can't find it. Any information about this tax would be helpful. Or even better the link to it. Thanks.

How is that possible? ETF's are securities trading in shares not contracts.

[aiki14]

How is that possible? ETF's are securities trading in shares not contracts.

In the rebalancing that occasionally occurs within the fund, there can be tax implications. It's a very rare occurrence but can happen.
When a stock is removed from the S&P for example another is added, there is a sell of the first which can result in a taxable gain or loss. If the gain results in a distribution there will be tax consequences in the SPY.
http://chancefavors.com/2007/08/tax-efficiency-of-etfs/
http://www.usatoday.com/money/perfi/columnist/krantz/2007-01-31-etf-dividends_x.htm

Certain ETF's are treated differently. The gold ETF's are considered differently under tax law.
http://www.smartmoney.com/investing/economy/some-commodity-etfs-carry-tax-risks-23682/

[LongArm]

Zanoob, I believe you're referring to ETFs which invest in commodities futures. These are marked to market at the end of each year. A Google search will bring up some articles on it.

[ZaNoob]

Thanks Aiki and LongArm. I want to know more about these so I don't stumble into traps. Can you magine day trading an ETF for measly gains then getting a tax bill for 100K at the end of the year? Someone will have this in his/her stocking this year.