State Taxation of Dividends from Leveraged ETFs or Futures-Based ETFs

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sweetnpsycho
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Joined: Sat Jan 04, 2020 7:29 pm

State Taxation of Dividends from Leveraged ETFs or Futures-Based ETFs

Post by sweetnpsycho »

I own TQQQ and UPRO and BITO and more.

For 1st quarter of 2023, the dividends paid from highest to lowest among the 3 ETFs are:

1. TQQQ
2. BITO
3. UPRO

I thought dividend from leveraged ETFs would be from underlying. For example, TQQQ dividend should reflect yield of QQQ. BITO dividend should reflect yield of bitcoin futures (which should be 0%). And UPRO dividend should reflect yield of SPY.

Dividend yield of QQQ is lower than that of SPY:

- https://finance.yahoo.com/quote/QQQ/
- https://finance.yahoo.com/quote/SPY/

Based on my assumptions, BITO should have lowest yield while UPRO should have the highest. Therefore, the dividend payments from previous quarter showed that my assumptions were wrong. I did a bit more digging and saw the holdings of the ETFs:

- https://www.proshares.com/our-etfs/leve ... verse/tqqq
- https://www.proshares.com/our-etfs/leve ... verse/upro
- https://www.proshares.com/our-etfs/strategic/bito

(Click on holdings tab to see daily holdings.)

A large percentage of holdings for the above are treasury bills. This explains the perplexing dividend payments for 1st quarter of 2023. Since a huge portion of dividend comes from treasury bills, that means a substantial portion of dividends are excluded from state taxes. How would you calculate the portion of dividend exempt from state taxes? What sources can you include in your files in case of audit?
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