[lconstable613]

With respect to Matt Levine, the exact opposite is true. ETFs were a tax dodge that became embedded in the system. To get technical, Congress enacted §311(b) exemptions in 1986, exempting gain recognition for in-kind distributions for Subchapter M companies as §852(b)(6). At the time, mutual funds rarely distributed property in kind. The first ETF appeared in 1993, and the spectacular tax advantage is a big reason for its success. Given their popularity, ETFs are also given regulatory exemptive relief from parts of the '33 and '40 Acts. I'd argue this is like frequent flyer miles -- the IRS basically gave up on collecting them as taxable income because everyone thought of them as free.

Credential - I'm a lawyer and value investor @ https://lembascapital.com/ and I spend a great deal of time looking at fund structures.

PS Other smart mutual funds began distributing in kind once they realized this tax structure was sufficiently embedded. See e.g. Sequoia Fund, the famous value investing mutual fund (at least pre Valeant) - https://www.wsj.com/articles/SB921028092685519084

[Lazare]

> With respect to Matt Levine, the exact opposite is true.

You may want to re-read what he wrote then, because you're literally just restating what he said. He even covered the history of the tax break, noting, as you did, that the law changed decades before the first ETF appeared in 1993.

Levine is explicitly saying that this whole thing came about by accident decades ago but today it has become "embedded in the system", and everyone, up to and including the regulators, believes that the point of an ETF is to be tax efficient, so they're going to let them be tax efficient, even if that requires some legal gymnastics.

> I'd argue this is like frequent flyer miles -- the IRS basically gave up on collecting them as taxable income because everyone thought of them as free.

Exactly. What exactly do you think you're disagreeing with Levine about?

[jannotti]

It doesn't seem like you and Matt Levine are disagreeing about anything material. Just over whether it should be called a "dodge" or not. It's just a rule. It's almost exactly like the rule for real estate like-kind exchanges (at least in the effect it ends up having - you can swap the asset you're in without the frictional cap gains tax).

[benj111]

I didn't read the Levine article as stating where ETFs games from, rather where they are today.

"I'd argue this is like frequent flyer miles -- the IRS basically gave up on collecting them as taxable income because everyone thought of them as free."

Isn't that what Levine is also arguing? Realpolitik as tax law.