ETF Tax Dodge

Bloomberg reports on "The ETF Tax Dodge". It's an interesting story which has its roots in the Nixon years.

https://www.bloomberg.com/graphics/2019-etf-tax-dodge-lets-investors-save-big/

"That loophole gives ETFs a tax advantage over mutual funds. It went from a footnote in the tax code to the cornerstone of a new industry.

For some of the earliest ETFs, which followed broad indexes such as the S&P 500 and rarely changed holdings, the daily process of brokers creating and redeeming was enough to wash away almost all capital gains. The first and largest ETF, State Street's SPDR S&P 500 ETF, hasn't reported a taxable gain in 22 years. In contrast, a traditional mutual fund run by Fidelity Investments that tracks the same index had a taxable gain in 10 of those years."

"The Internal Revenue Service says it's aware of heartbeats and wouldn't say whether it considers them an abuse."

One example Bloomberg cites ends with, "Thanks to winnings on stocks like that, the fund reported more than $4 billion in capital gains for the year. But since it used the ETF tax loophole to shield those gains from taxes, its annual report shows, it ended up reporting a $309 million capital loss to the IRS."

Somehow it sounds like the taxpaying citizen is paying the full bill while these investment funds are walking away scott free.