Finance

ETF Strategist

ETF Street
ETF Strategist

Fund managers can generate capital gains taxes for shareholders when they buy and sell securities.
However, fewer exchange-traded fund investors get such an annual tax bill relative to those holding mutual funds.
ETFs have these tax benefits due to “in-kind” transactions, experts said.

Israel Sebastian | Moment | Getty Images

Investors who hold exchange-traded funds can often escape a tax bill incurred by those with mutual funds, which are generally less tax efficient, according to investment experts.
ETFs and mutual funds are baskets of stocks, bonds and other financial assets overseen by professional money managers. But they have a different legal structure that bestows ETFs with a “tax magic that’s unrivaled by mutual funds,” Bryan Armour, the director of passive strategies research for North America and editor of the ETFInvestor newsletter at Morningstar, wrote this year.

That tax savings relates to annual capital gains distributions within the funds.
Capital gains taxes are owed on investment profits.
Fund managers can generate such taxes within a fund when they buy and sell securities. The taxes then get passed along to all the fund shareholders, who owe a tax bill even if they reinvest those distributions.
The ETF tax advantage is by virtue of “in-kind creations and redemptions,” which essentially provides for tax-free trades for many ETFs, experts explain. (The ETF’s in-kind transaction mechanism is somewhat complex. At a high level, it involves large institutional investors called “authorized participants,” which create or redeem ETF shares directly with the ETF provider.)
The tax advantage is generally most apparent for stock funds, they said.

For example, more than 60% of stock mutual funds distributed capital gains in 2023, according to Morningstar. That was true for just 4% of ETFs.
Less than 4% of ETFs are expected to distribute capital gains in 2024, Morningstar estimates. Such data isn’t yet available for mutual funds.

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Importantly, this tax advantage is only relevant for investors holding funds in taxable accounts, experts said.
It’s a moot point for retirement account investors like those with a 401(k) plan or individual retirement account, which already come with tax benefits, experts said.
The tax advantage “really helps the non-IRA account more than anything,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida, and a founding member of Moisand Fitzgerald Tamayo.
“You’ll have tax efficiency that a standard mutual fund is not going to be able to achieve, hands down,” he said.

However, ETFs don’t always have a tax advantage, experts said.
For example, certain ETF holdings may not be able to benefit from in-kind transactions, Armour said.
Examples include physical commodities, as well as derivatives like swaps, futures contracts, currency forwards and certain options contracts, he said.
Additionally, certain nations like Brazil, China, India, South Korea and Taiwan may treat in-kind redemptions of securities domiciled in those countries as taxable events, he said. More

Small businesses had been required to report “beneficial ownership information” to the Treasury Department by Jan. 13, 2025, or risk financial penalties.
The 5th U.S. Circuit Court of Appeals issued an order late on Dec. 26 that halted enforcement. It comes just days after a previous delay, from Jan. 1.
Businesses aren’t required to file a BOI report and won’t face liability while that order is in effect.
It will likely be in force until at least March, one legal expert said.

Janet Yellen, U.S. Treasury secretary, on a tour of the Financial Crimes Enforcement Network (FinCEN) in Vienna, Virginia, on Jan. 8, 2024.
Valerie Plesch/Bloomberg via Getty Images

An upcoming Treasury Department deadline for millions of small businesses to fulfill a new reporting requirement on “beneficial ownership information” was delayed again, following a court order that suspended enforcement.
The regulation, which would require small businesses to disclose the identity of people who directly or indirectly own a control a company, is designed to prevent criminals from hiding illicit activity conducted through shell companies or opaque ownership structures, the Treasury said.

The 5th U.S. Circuit Court of Appeals issued an order late on Dec. 26 that halted enforcement while the court “considers the parties’ weighty substantive arguments” on the constitutionality of the Corporate Transparency Act, which created the BOI reporting requirement, the order said.
The new deadline, which had been Jan. 13, is now unclear.
“While it is not known how long the injunction will remain in effect, the case is calendared for oral argument en banc on March 25, 2025, so we expect that the injunction will be effective at least through March,” Daniel Stipano, a partner at law firm Davis Polk & Wardwell, wrote in an email.
In the interim, businesses aren’t required to file BOI reports to the Financial Crimes Enforcement Network, known as FinCEN, which is part of the Treasury.

Businesses don’t face liability for the time being

Whiplash for small businesses

The delay represents a bit of legal whiplash for small business owners.
On Dec. 3, a federal court in Texas temporarily blocked the Treasury from enforcing BOI reporting rules, which at that time were set to take effect Jan. 1, 2025.

Then, on Dec. 23, a motions panel of 5th Circuit lifted that enforcement injunction after an appeal from the federal government. On Dec. 26, a different panel of that same appeals court – the merits panel – put the injunction back into place.
“The bottom line is that no one needs to file a BOI Report – unless and until the injunction is lifted,” Stipano explained in an email.

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The Federal Reserve in December projected fewer interest rate cuts for 2025.
Yields on high-yield savings accounts, money market funds, certificates of deposit and other cash-like accounts should benefit from this “higher for longer” rate environment.

Images By Tang Ming Tung | Digitalvision | Getty Images

Many people, especially those with debt, will be discouraged by the recent Federal Reserve forecast of a slower pace of interest rate cuts than previously forecast.
However, others with money in high-yield cash accounts will benefit from a “higher for longer” regime, experts say.

“If you’ve got your money in the right place, 2025 is going to be a good year for savers — much like 2024 was,” said Greg McBride, chief financial analyst at Bankrate.

Why higher for longer is the 2025 ‘mantra’

Returns on cash holdings are generally correlated with the Fed’s benchmark interest rate. If the Fed raises interest rates, then those for high-yield savings accounts, certificates of deposit, money market funds and other types of cash accounts generally rise, too.
The Fed increased its benchmark rate aggressively in 2022 and 2023 to rein in high inflation, ultimately bringing borrowing costs from rock-bottom rates to their highest level in more than 22 years.  

It started throttling them back in September. However, Fed officials projected this month that it would cut rates just twice in 2025 instead of the four it had expected three months earlier.
“Higher for longer is the mantra headed into 2025,” McBride said. “The big change since September is explained by notable upward revisions to the Fed’s own inflation projections for 2025.”

The good and bad news for consumers

The bad news for consumers is that higher interest rates increase the cost of borrowing, said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
“[But] higher interest rates can help individuals of all ages and stages build savings and prepare for any emergencies or opportunities that may arise — that’s the good news,” said Cheng, who is a member of CNBC’s Financial Advisor Council.
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High-yield savings accounts that pay an interest rate between 4% and 5% are “still prevalent,” McBride said.
By comparison, top-yielding accounts paid about 0.5% in 2020 and 2021, he said.
The story is similar for money market funds, he explained.
Money market fund interest rates vary by fund and institution, but top-yielding funds are generally in the 4% to 5% range.
However, not all financial institutions pay these rates.
The most competitive returns for high-yield savings accounts are from online banks, not the traditional brick-and-mortar shop down the street, which might pay a 0.1% return, for example, McBride said.

Things to consider for cash

There are of course some considerations for investors to make.
People always question which is better, a high-yield savings account or a CD, Cheng said.
“It depends,” she said. “High-yield savings accounts will provide more liquidity and access, but the interest rate isn’t fixed or guaranteed. The interest rate will fluctuate, nor your principal. A CD will provide a fixed guaranteed interest rate, but you give up liquidity and access.”

Additionally, some institutions will have minimum deposit requirements to get a certain advertised yield, experts said.
Further, not all institutions offering a high-yield savings account are necessarily covered by Federal Deposit Insurance Corp. protections, said McBride. Deposits up to $250,000 are automatically protected at each FDIC-insured bank in the event of a failure.
“Make sure you’re sending your money directly to a federally insured bank,” McBride said. “I’d avoid fintech middlemen that rely on third-party partnerships with banks for FDIC insurance.”
A recent bankruptcy by one fintech company, Synapse, highlights that “unappreciated risk,” McBride said. Many Synapse customers have been unable to access most or all of their savings.

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Treasury yields were slightly higher early Friday after a mixed set of data on weekly jobless claims.
The yield on the benchmark 10-year Treasury was 3 basis points higher at 4.607%, slightly down from its peak earlier in the week but back above the 4.6% level it had not breached since May. The 2-year Treasury was fractionally higher at 4.334%.

One basis point is equal to 0.01%. Yields move inversely to prices.

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The U.S. Treasury Department delayed a Jan. 1, 2025, deadline to file a new “beneficial ownership information” report by about two weeks, to Jan. 13.
It delayed the BOI reporting requirement following recent federal court rulings.
The requirement was created by the Corporate Transparency Act, which aims to curb illicit finance.

Janet Yellen, U.S. Treasury secretary, on a tour of the Financial Crimes Enforcement Network (FinCEN) in Vienna, Virginia, on Jan. 8, 2024.
Valerie Plesch/Bloomberg via Getty Images

The U.S. Treasury Department has delayed the deadline for millions of small businesses to Jan. 13, 2025, to file a new form, known as a Beneficial Ownership Information report.
The Treasury had initially required many businesses to file the report to the agency’s Financial Crimes Enforcement Network, known as FinCEN, by Jan. 1. Noncompliance carries potential fines that could exceed $10,000.

This delay comes as a result of legal challenges to the new reporting requirement under the Corporate Transparency Act.
The rule applies to about 32.6 million businesses, including certain corporations, limited liability companies and others, according to federal estimates.
Businesses and owners that didn’t comply would potentially face civil penalties of up to $591 a day, adjusted for inflation, according to FinCEN. They could also face up to $10,000 in criminal fines and up to two years in prison.
However, many small businesses are exempt. For example, those with over $5 million in gross sales and more than 20 full-time employees may not need to file a report.

Why Treasury delayed the BOI reporting requirement

The Treasury delayed the compliance deadline following a recent court ruling.

A federal court in Texas on Dec. 3 had issued a nationwide preliminary injunction that temporarily blocked FinCEN from enforcing the rule. However, the 5th U.S. Circuit Court of Appeals reversed that injunction on Monday.

“Because the Department of the Treasury recognizes that reporting companies may need additional time to comply given the period when the preliminary injunction had been in effect, we have extended the reporting deadline,” according to the FinCEN website.
FinCEN didn’t return a request from CNBC for comment about the number of businesses that have filed a BOI report to date.
Some data, however, suggests few have done so.
The federal government had received about 9.5 million filings as of Dec. 1, according to statistics that FinCEN provided to the office of Rep. French Hill, R-Ark. That figure is about 30% of the estimated total.
Hill has called for the repeal of the Corporate Transparency Act, passed in 2021, which created the BOI requirement. Hill’s office provided the data to CNBC.
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“Most non-exempt reporting companies have not filed their initial reports, presumably because they are unaware of the requirement,” Daniel Stipano, a partner at law firm Davis Polk & Wardwell, wrote in an e-mail.
There’s a potential silver lining for businesses: It’s “unlikely” FinCEN would impose financial penalties “except in cases of bad faith or intentional violations,” Stipano said.
“In its public statements, FinCEN has made clear that its primary goal at this point is to educate the public about the requirement, as opposed to taking enforcement actions against noncompliant companies,” he said.

Certain businesses are exempt from BOI filing

The BOI filing isn’t an annual requirement. Businesses only need to resubmit the form to update or correct information.
Many exempt businesses — such as large companies, banks, credit unions, tax-exempt entities and public utilities — already furnish similar data.
Businesses have different compliance deadlines depending on when they were formed.
For example, those created or registered before 2024 have until Jan. 13, 2025, to file their initial BOI reports, according to FinCEN. Those that do so on or after Jan. 1, 2025, have 30 days to file a report.

There will likely be additional court rulings that could impact reporting, Stipano said.
For one, litigation is ongoing in the 5th Circuit, which hasn’t formally ruled on the constitutionality of the Corporate Transparency Act.
“Judicial actions challenging the law have been brought in multiple jurisdictions, and these actions may eventually reach the Supreme Court,” he wrote. “As of now, it is unclear whether the incoming Trump administration will continue to support the Government’s position in these cases.”

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