When it comes to commodities investing and taxes, the devil really is in the details.
Trading in commodities used to be strictly for the pros, but the recent proliferation of commodity exchange-traded products is opening the door to the average investor. It’s easy to see why demand is growing for these funds: crude oil is back over $100 a barrel; gold and silver are hitting new highs; and food prices are rising.
But if you’re considering investing in commodity funds in a taxable, nonretirement account, it helps to understand the unique structures and tax implications associated with these funds. In fact, the fund structure can even help you choose the right product, depending on your investment objectives and personal preferences.
Commodity ETPs currently come in one of three structures: grantor trusts, limited partnerships and exchange-traded notes (ETN). All three structures are registered under the Securities Act of 1933, in contrast to most equity funds, which are structured as open-ended funds and registered under the Investment Company Act of 1940.
Grantor trusts and limited partnerships are considered exchange-traded funds, while ETNs are not. Thus, the term ETP is used when referring to all three structures.
| Popular Commodity Funds And Their Structures | |||||||||
| State Street Global Advisors | ETF Securities | BlackRock | Deutsche Bank*** | US Commodity Funds | Merrill Lynch | UBS | Barclays Capital | ||
| Product Line, | SPDR | ETFS | iShares | iShares S&P GSCI | PowerShares DB** | US Commodity Funds | ELEMENTS RICI | E-TRACS | iPath Dow Jones-UBS, iPath S&P GSCI |
| Tickers | GLD | SGOL, SIVR | SLV, IAU | GSG | DBC, DBA, DBO | USO, UNG | RJI, RJA | DJCI, UCI, UAG | DJP, JJA, OIL |
| Holdings | Physically Held | Physically Held | Physically Held | Futures | Futures | Futures | N/A | N/A | N/A |
| Legal Structure* | Grantor Trust | Grantor Trust | Grantor Trust | Limited Partnership | Limited Partnership | Limited Partnership | ETN | ETN | ETN |
| Current Tax Implication | LT taxed at 28% ("collectible")/ ST taxed at ordinary income rate | LT taxed at 28% ("collectible")/ ST taxed at ordinary income rate | LT taxed at 28% ("collectible")/ ST taxed at ordinary income rate | 60% of gains taxed as LT gains/40% taxed as ST (ordinary income) | 60% of gains taxed as LT gains/40% taxed as ST (ordinary income) | 60% of gains taxed as LT gains/40% taxed as ST (ordinary income) | 15% for LT gains/ Ordinary income rate for ST | 15% for LT gains/ Ordinary income rate for ST | 15% for LT gains/ Ordinary income rate for ST |
| Tax Reporting | 1099 | 1099 | 1099 | K-1 | K-1 | K-1 | 1099 | 1099 | 1099 |
| *For ETNs, the issuer listed in the table may not be the issuing bank of the actual note. Investors should refer to the prospectus for details regarding issuer risk. | |||||||||
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**PowerShares DB also offers a host of leveaged and inverse commodity funds structured as ETNs. *** Invesco PowerShares is the distributor of these Deutsche Bank products. |
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Grantor Trusts
Grantor trust structures are often used for “physically held” precious metals ETFs. These funds actually hold the physical commodity in vaults, giving investors exposure to spot prices of the underlying metal.
The largest funds are the SPDR Gold Trust (NYSEArca: GLD) and the iShares Silver Trust (NYSEArca: SLV). In fact, GLD is the second-largest ETF in the world, with over $58 billion in assets under management as of May 9. Other notable ETFs include the iShares Gold Trust (NYSEArca: IAU) and a number of other precious metals funds offered by ETF Securities.
Under current Internal Revenue Service rules, investments in these precious metals ETFs are considered “collectibles,” and gains are taxed at a maximum of 28 percent if held for more than a year. In contrast, long-term gains in equity funds are currently taxed at 15 percent. Similar to equities, if they’re held less than a year, gains are taxed at the individual’s ordinary income tax rate.
