ETF Tax Basics - Fidelity (2024)

How to determine the potential tax impact on you of buying, holding, or selling ETFs.

J.K. Lasser

Exchange-traded funds (ETFs) have some features of both individual stocks and mutual funds, but are unique investment vehicles. From a tax perspective, here are some basic rules about ETFs you need to know.


Annual distributions from an ETF to investors may be treated as qualified or nonqualified dividends. See the chart below for qualified dividend tax rates. Please note that just because the ETF reports on Form 1099-DIV that its distribution was a qualified dividend does not automatically make it qualified for the investor. The investor must have held the ETF for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date.


Like stock, an investor’s basis in ETF shares usually is based on cost—what the investor paid for the shares, plus any sales commissions. (Different rules apply if the investor receives shares by gift or inheritance.) Basis is increased by any taxable dividends that are reinvested in additional ETF shares.

Capital gain or loss

When you sell shares in ETFs, you’ll have a capital gain or loss, depending on your basis in the shares. This is no different than the tax treatment that applies to the sale of shares in individual stocks or in mutual funds. See chart below for 2024 rates.

Capital losses on the sale of shares in ETFs can be used to offset capital gains and up to $3,000 of ordinary income ($1,500 for married persons filing separately). Capital losses in excess of these limits can be carried forward and used in future years.

In addition to the capital gains tax, there is also a special Medicare tax of 3.8%. This applies to net investment income (including gains from sales of ETFs) and applies to investors with modified adjusted gross income (MAGI) above $200,000 for single filers and $250,000 for couples filing jointly. The tax of 3.8% is on top of capital gains taxes. So for investors paying long-term capital gain rates, they can be as high as 23.8%, not including state and local taxes, which can push your tax rate even higher.

ETF Tax Basics - Fidelity (1)

Tax efficiency

It is repeatedly said that ETFs offer tax efficiency. What does this mean? There are essentially two reasons for this label.

  • Marketing timing. Unlike mutual fund shares that can only be bought and sold at the end of the trading day, shares in ETFs can be purchased throughout the trading day like stocks. This allows investors to get in and out of their holding when investment decisions and tax results dictate. What’s more, ETFs also utilize a process called "Create and Redeem" to facilitate investor purchases and sales of the ETF shares. Under Create and Redeem, ETFs (unlike traditional, open-end mutual funds) do not have to sell individual securities in order to meet redemptions; instead can use an Authorized Participant (AP) to act as a tax-smart clearinghouse to facilitate redemptions.
  • Distributions. Both mutual funds and ETFs generally are required to distribute capital gains to investors, which can potentially result in a significant tax cost annually.

A Final Word

To determine the potential tax impact on you of buying, holding, or selling ETFs, talk with your personal tax advisor.

ETF Tax Basics - Fidelity (2024)


How am I taxed on ETFs? ›

Dividends and interest payments from ETFs are taxed similarly to income from the underlying stocks or bonds inside them. For U.S. taxpayers, this income needs to be reported on form 1099-DIV. 2 If you earn a profit by selling an ETF, they are taxed like the underlying stocks or bonds as well.

What is the 30 day rule on ETFs? ›

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Does Fidelity charge fees for ETFs? ›

Free commission offer applies to online purchase of ETFs in a Fidelity retail account. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). ETFs are subject to market fluctuation and the risks of their underlying investments.

How to calculate cost basis for ETFs? ›

General rule. Like stock, an investor's basis in ETF shares usually is based on cost—what you paid for the shares, plus any sales commissions.

Do I pay taxes on ETFs if I don't sell? ›

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

How do ETF avoid capital gains? ›

ETFs are built to avoid the capital gains that result from turnover and redemptions. Investors buy or sell ETF shares on a stock exchange from other investors, not the fund. This avoids the need to raise cash to meet redemptions for small investors.

What is the 3 5 10 rule for ETF? ›

Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).

Is it OK to hold ETF long-term? ›

Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.

Is it good to hold ETF for long-term? ›

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

What is Fidelity's best performing ETF? ›

The largest Fidelity ETF is the Fidelity Wise Origin Bitcoin Fund FBTC with $9.93B in assets. In the last trailing year, the best-performing Fidelity ETF was FDIG at 71.37%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

Which ETFs are free on Fidelity? ›

Commission-Free ETFs on Fidelity
Symbol SymbolETF Name ETF NameDividend Date Dividend Date
IJHiShares Core S&P Mid-Cap ETF2024-03-21
IEMGiShares Core MSCI Emerging Markets ETF2023-12-20
IJRiShares Core S&P Small-Cap ETF2024-03-21
ITOTiShares Core S&P Total U.S. Stock Market ETF2024-03-21
4 more rows

How does Fidelity ETF work? ›

How ETFs work. An ETF is bought and sold like a company stock during the day when the stock exchanges are open. Just like a stock, an ETF has a ticker symbol and intraday price data can be easily obtained during the course of the trading day.

How does the IRS know the cost basis? ›

The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.

Why is my cost basis not showing on Fidelity? ›

Some of the most common reasons for unknown cost basis are: Shares are transferred to the Fidelity account from another institution. Shares were transferred between two accounts registered to different Social Security Numbers. Shares were transferred between mutual fund accounts and brokerage accounts before August, ...

What happens if you don't know the cost basis of a stock? ›

The bottom line is that the IRS expects you to maintain records that identify the cost basis of your securities. If you don't have adequate records, you might have to rely on the cost basis that your brokerage firm reports—or you may be required to treat the cost basis as zero, which could mean owing more in taxes.

Do you pay taxes on ETF losses? ›

Tax loss rules

Losses in ETFs usually are treated just like losses on stock sales, which generate capital losses. The losses are either short term or long term, depending on how long you owned the shares. If more than one year, the loss is long term.

Are ETFs subject to tax? ›

Here it depends what the gain relates to as residential property (second homes, not primary residences) are subject to a different tax rate. But for investments like ETFs, you would pay 10% as a basic rate tax payer or 20% as a higher rate tax payer.

How are ETFs taxed in an IRA? ›

Sales and purchases—of stocks, bonds, funds, ETFs, or any other securities—that are made within an individual retirement account are not taxable. This rule applies to all investment transactions, regardless of whether the recipient has accrued capital gains, dividend payments, or interest income.

Do ETFs have a tax cost ratio? ›

The tax-cost ratio is how Morningstar measures how much a fund's annualized return is reduced by the taxes investors pay on distributions. Morningstar calculates it on products such as mutual funds and Exchange Traded Funds (ETFs).

Top Articles
Latest Posts
Article information

Author: Allyn Kozey

Last Updated:

Views: 6388

Rating: 4.2 / 5 (43 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Allyn Kozey

Birthday: 1993-12-21

Address: Suite 454 40343 Larson Union, Port Melia, TX 16164

Phone: +2456904400762

Job: Investor Administrator

Hobby: Sketching, Puzzles, Pet, Mountaineering, Skydiving, Dowsing, Sports

Introduction: My name is Allyn Kozey, I am a outstanding, colorful, adventurous, encouraging, zealous, tender, helpful person who loves writing and wants to share my knowledge and understanding with you.