The taxation of options on exchange traded funds ETFs hinges upon both the structure of the fund and whether the option is listed or over-the-counter.

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All early ETFs were setup as RICs. Gains and losses are only recognized when the option position is closed or expired.

S P Index Options

Note that for writers of these options, all gains or losses will be treated as short-term regardless of how long the option position is held open. This treatment applies regardless of whether the investor is long or short the option.

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In addition, the options must be marked to the market on December 31, all unrecognized gains and losses are realized at year-end. After all of the ETF innovation in the marketplace, we find the number of options that will be treated as non-equity options has grown.

Special Tax Rules for Options

If the ETF is not set up as a RIC, but as a trust like GLD or a limited partnership like USO , then listed options on the ETF would be treated as a non-equity option under Section Investors can maximize their after-tax returns from the use of options on ETFs by using Section options if they plan on holding the option for less than one year or if they are writing the options. If the investor plans on holding the option for over one year, then options on a corporate ETF or an OTC option would be preferable.

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There have also been a large amount of exchange traded notes ETNs issued with their returns tied to various types of securities and commodities.

As long as the value of the ETN is not tied to a single stock or a narrow based stock index, then listed options on ETNs should be treated as Sec.

Options involve risk and are not suitable for all investors. Before engaging in an options transaction, investors must review the booklet " Characteristics and Risks of Standardized Options ". Twenty-First Securities Corporation Third Avenue New York, NY How Are Your ETF Options Taxed?

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