Over the past few years, Democrats in Congress have proposed several pieces of legislation that would end the tax preferences afforded to exchange-traded funds (ETFs).
Under the current ETF rules, ETF managers can sell positions by using "in-kind transactions" without triggering capital gains tax liability. The rule essentially allows the ETF manager to swap underlying holdings without subjecting the ETF investors to capital gains tax liability. The most recent set of proposals would generally eliminate the nonrecognition rule for in-kind transactions.
We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about recent proposals to end the tax preferences granted to ETFs.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Bloink
Byrnes
Their Reasons:
Bloink: ETFs are a complex investment structure that allow taxpayers to avoid capital gains tax liability indefinitely if they're paid "in kind." This tax treatment provides a huge tax loophole for wealthy investors looking to avoid paying their fair share of taxes. These are complex investment options that overwhelmingly benefit the highest-net-worth Americans out there.
Byrnes: The benefits afforded to ETFs are available across the board to every single investor. This isn't some obscure investment vehicle that benefits only the wealthy. Taxpayers don't have to obtain accredited investor status to participate in the investment option, and many ordinary Americans can and do invest in ETFs. ETFs are widely available pass-through vehicles. That means that every bit of the increased tax liability for an ETF is directly passed to the ETF investors and changing the tax structure here isn't called for.
