What are the tax implications for investors, especially regarding dividend distributions and capital gains?

Short answer:

The press release that announced the launch of the First Trust RBA Deglobalization ETF (ticker DGLO) does not spell out any special tax treatment. Therefore, investors should expect the same tax‑profile that applies to most U.S.‑registered, pass‑through equity ETFs:

Below is a more detailed explanation of each of those points and the practical steps you should take.

1. Dividend Distributions

1. Ordinary vs. Qualified

   • Ordinary dividends are taxed at your marginal ordinary‑income tax rate.
     
   • Qualified dividends (most U.S. corporate dividends) qualify for the lower long‑term capital‑gain rates, provided you have held the underlying shares for more than 60 days during the 121‑day period that begins 60 days before the ex‑dividend date. The ETF’s 1099‑DIV will identify the portion that is qualified.

2. Timing – The fund will likely pay quarterly (or possibly monthly) dividends, typical for equity‑style ETFs. The exact schedule will be published in the ETF’s prospectus and on the First Trust website.

3. Tax Reporting – At year‑end you will receive a Form 1099‑DIV that lists:

   • Total ordinary dividends
     
   • Qualified dividends
     
   • Section 199A (Qualified Business Income) dividends (if any)
     
   • Capital‑gain distributions (see next section)
     

4. Potential Foreign Withholding – If the RBA U.S. Deglobalization Index includes any non‑U.S. stocks, those dividends may have foreign tax withheld at the source (e.g., 15 % from a treaty‑country, 30 % from a non‑treaty country). The ETF will pass that withholding through to you, and you can claim a foreign‑tax credit on your U.S. return, subject to the usual limits.

2. Capital‑Gain Distributions

1. Why ETFs usually generate few gains – When large investors (authorized participants) create or redeem shares, the ETF can swap securities “in‑kind” rather than selling them on the open market. This avoids realizing gains that would otherwise be taxable to shareholders.

2. When gains do occur –

   • Rebalancing the index (e.g., when constituents are added/removed) can force the fund to sell securities.
     
   • Large redemptions that cannot be satisfied in‑kind may require the ETF to sell underlying positions.
     
   • Corporate actions (spin‑offs, mergers) can create taxable events.

3. Tax treatment – Any net gains realized by the fund are passed through as capital‑gain distributions. They are taxed the same way as if you had sold the underlying securities yourself:

   • Short‑term (assets held ≤ 1 year) → ordinary‑income rates.
     
   • Long‑term (assets held > 1 year) → 0 %/15 %/20 % rates plus the 3.8 % NIIT if your MAGI exceeds the threshold.

4. Reporting – Capital‑gain distributions appear on Form 1099‑DIV in separate boxes (short‑term, long‑term, and Section 1256 if applicable). No additional filing is required beyond the normal 1040.

3. Capital Gains on the Sale of Your DGLO Shares

Key points:

• Cost‑basis tracking – Your brokerage will keep track of the average cost basis (or FIFO/LIFO if you specify). The basis will be adjusted for any reinvested dividends and for any capital‑gain distributions you receive.
• Wash‑sale rules – If you sell DGLO at a loss and buy it back (or acquire a “substantially identical” security) within 30 days, the loss is disallowed for the current tax year and added to the basis of the new purchase.
• Netting – At year‑end you can net short‑term gains against short‑term losses and long‑term against long‑term, then offset the net result against any capital‑loss carryovers you may have.

4. Practical Steps for Investors

1. Read the ETF’s prospectus & Statement of Additional Information (SAI).

   • Those documents contain the exact dividend schedule, any “qualified dividend” designations, and a description of the fund’s tax‑efficiency measures.

2. Monitor quarterly fund reports.

   • First Trust will publish a distribution notice before each dividend payment, showing the expected amount and whether it is ordinary vs. qualified.

3. Plan for tax‑efficiency.

   • If you are in a high marginal tax bracket, you may prefer to hold DGLO in a tax‑advantaged account (IRA, 401(k), etc.) to defer or eliminate taxes on dividends and capital‑gain distributions.
     
   • If you hold it in a taxable brokerage, consider tax‑loss harvesting toward year‑end to offset any gains from the ETF.

4. Check for foreign‑tax credits.

   • If you receive foreign withholding, the 1099‑DIV will show the amount withheld. Use Form 1116 (if required) to claim the credit. Many investors find that a simple “tax‑payer election” on the 1040 works when the withheld amount is modest.

5. Consult a tax professional.

   • The tax consequences can vary based on your filing status, income level, state tax rules, and whether you have other investments that generate capital gains or losses. A CPA or tax‑advisor can help you integrate DGLO into an overall tax‑planning strategy.

5. Bottom‑Line Summary for DGLO Investors

Because the launch announcement does not provide any unique tax provisions, investors should treat DGLO like any other U.S. equity‑focused ETF and plan their holdings accordingly. Always keep the fund’s annual tax documents (Form 1099‑DIV, Form 1099‑B) and consider professional advice to optimize after‑tax returns.