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Are gains on bond ETFs held for more than one year taxed at a lower rate, similar to stocks and funds holding stocks? I'm referring to the change in price of the fund, not dividends.

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up vote 2 down vote accepted

Appreciation of a Capital Asset is a Capital Gain. In the United States, Capital Gains get favorable tax treatment after being held for 12 months.

From the IRS newsroom:

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2009, the maximum capital gains rate for most people is15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

The IRS defines a Capital Asset as "most property you own" with a list of exclusions found in Schedule D Instructions. None of the exclusions listed relate to Bond ETFs.

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There are exclusions, such as gold and futures contracts. They never get favorable treatment. That's what made me wonder about bonds ETFs. – James Roth Sep 2 '10 at 19:51

Yes, that's correct.

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