What are the tax implications when buying ETFs and Index funds?

On the tax front, exchange-traded funds (ETFs) and index funds are some of the most tax-efficient investments you can make. Plus, they are quite transparent, if that is important to your investing endeavors.

ETFs and index funds have very little turnover in their portfolios. Of course, if the index funds sell securities that have appreciated, they will create a capital gain and face a tax. But these vehicles face fewer capital gains than something that is actively managed.

That said, not all ETFs are created equal when it comes to tax implications. For example, a fund that invests primarily in precious metals will be slapped with a collectibles tax rate. Or, as another example, other commodity ETFs will require investors to file a Schedule K-1. Upon sale of currency ETFs, traders will see these profits treated as ordinary income.

Put simply, read the fund prospectus and you will see how a specific ETF is taxed.