- Inverse ETFs setback II

Inverse ETFs setback II

Written by Wilfred Ling

Friday, 20 February 2009

Previously I mentioned in my blog HERE that inverse/leverage ETFs were hit by a setback in which the huge capital gains were distributed to investors. I suspected this will result in a huge tax burden on investors residing in Singapore. Today I had the benefit of examining a detailed transaction belonging to a promiselander adviser who consulted and sought my advice on this. Here are the details:

She bought bought the Proshares UltraShort S&P500 ticker SDS in the early December 2008. However, from the Proshares website, it is indicated that on 23 Dec 2008 ex-dividend date, a massive distribution were made. These consisted of dividend distribution of US$0.028553/share and short-term capital gain distribution of US$11.46188/share. She held 20 shares of this ETF. The gross payment should be 20*( 11.46188 + 0.028553) = US$229.80866. However, on 30 Dec 2008 which is the payment date, she received 70% of this amount exactly. Thus that 30% was due to the withholding tax. Normally, the 30% withholding tax is applied for dividend. However, for this ETF that gave out large capital gain distribution, it seems that it was taxed as if it was like a “dividend”. She was shocked upon knowing this. I was not surprised at her shocked because foreigners investing in US are only subjected to the dividend tax. There should not be any capital gain tax at all.

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