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Posted by on Feb 11, 2014 in Investment Perspective, Treesdale

Commodity Fund Taxation

Commodity Fund Taxation

Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE), address how tax treatment can differ among commodity-based investment structures.

As markets, investment products and the manner in which clients access information have all evolved, advisors are answering more and more questions about how to invest in commodities which means advisors have to learn about the various taxation structures of the many different types of commodity exchange traded products.

The appeal to commodities exposure is that historically they have tended to have a low correlation to other asset classes, most notably equities. The potential diversification benefits drew much scrutiny in 2013 due to gold’s 28% price decline although reasonably speaking the correlation effect would appear to be alive and well if the S&P 500 went up 30% and gold went down by a similar amount.

The big idea is that clients will have increasingly more questions about commodity exposure for their portfolios perhaps not realizing that tax complications they may be taking on depending on the structure of the fund they choose. They will be looking to their advisors  to educate them on how to use and how to choose commodity funds.

The most difficult types of funds for clients are ones that generate K1 partnership forms which usually pertains to funds structured as limited partnerships. These funds can trigger unrelated business taxable income (UBTI) which can generate tax owed on shares held but not yet sold in an IRA or other tax advantaged account. Grantor trusts that own physical precious metals are often taxed as collectibles which don’t get the benefit of long term capital gains tax rates and short term gains are taxed as ordinary income.

Investors and their advisors may find the taxation of funds structured under the Investment Company Act of 1940 to be more favorable for their simplicity and that they do not generate K1 forms.

The commodity fund space will continue to evolve to make investing in this asset class less onerous from a tax perspective but for now the choices tax simplification are limited.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.

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