Many investors are going to feel the pain from changes in the tax code on capital gains this year, after a 2013 that left mutual fund investors with unwelcome capital gains payouts to begin with. The best way to end these unpleasant surprises is to avoid unnecessary taxation in the first place. While exchange-traded funds have long been sold as a more efficient investment vehicle than traditional mutual funds, a major — and potentially misunderstood — facet of that efficiency has to do with taxes. Advisers often ask me what makes ETFs more tax efficient, and while the mechanics of these efficiencies can be onerous, it is worthwhile to break down some key differences of these two popular product categories.