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Comment by jayess | Hacker News Reader

The person who initially invested does. I don't see at all how this is a tax dodge.

Agreed I see this more as a transfer than a dodge.

The person who individually invested doesn’t have to pay the tax until they sell their shares in the ETF, perhaps decades later. That’s generally considered a tax dodge because deferral of taxes lets you keep that money and compound it.

$10 of taxes deferred for 30 years at a modest interest rate of 2% puts an extra $8 in the investor’s pocket that should have gone to the government.

I'm not sure that's a "generally considered" definition. By that definition, I'm dodging taxes every year I don't sell my shares that I hold in my brokerage account.

From your other comments, I see why you don’t want it to be this way, which is a valid philosophical point. However, this is how the tax code treats any transaction today. You’re right you don’t owe tax if you hold a single company’s stock, but you do if you hold a mutual fund that trades its underlying shares during the year, or if you trade one stock in your portfolio for another. You owe it even if you sell a stock for a net profit and buy it back for exactly the same price ten minutes later. ETF’s are treated differently ...

Please explain. Just holding a mutual fund won’t generate any taxable events... except for dividend/distributions... just like a stock. Buying and selling ETFs are also treated just like a stock.

Not true. Every year, a mutual fund is required to distribute an amount equal to the capital gains realized by the fund in that year. For a mutual fund that trades actively, that could be a sizeable fraction of the amount you have invested. This is cap gains, not a dividend. Stocks and ETF’s don’t do that. https://www.investopedia.com/terms/c/capitalgainsdistributio...

Good to know! My funds generate relatively small capital gains distributions (most of what I see on my 1099's is from dividends) so I never noticed it.

Edit: Though now that you mention it, I think I must've known this at some point in the past: that ETFs had preferential tax treatment. A while back, I moved my most recent investments to ETFs, even for the "same" fund (example: Vanguard Tech VITAX mutual fund vs VGT ETF) ...

Still, how are ETFs treated differently from a stock?

That's fine.

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