7960 / What special tax rules apply to currency ETFs?

Most currency ETFs are formed as grantor trusts. This means the profit from the trust creates ordinary income tax liability for the individual ETF shareholder based on the rules that apply to grantor trusts. As a result, currency ETFs are not eligible for favorable long-term capital gains treatment, even if the ETF is held for several years. Since currency ETFs trade in currency pairs, the taxing authorities assume that these trades take place over short periods of time.