Can the IRS Tax Gold?
Gold investments are a popular way to diversify portfolios. Before making the leap into investing in gold, however, it’s crucial that you understand any associated tax ramifications.
The IRS treats physical quantities of gold as collectibles, which are taxed at a maximum rate of 28% compared with long-term capital gains rates for traditional investments like stocks or mutual funds.
Taxes on Capital Gains
Many investors purchase physical gold and silver as an insurance policy against inflation and geopolitical turmoil, while also using precious metals to diversify their portfolios. Unfortunately, as with any investment holdings sold by them are subject to taxes upon being sold.
Dependent upon how long and what type of bullion investment, capital gains taxes will be levied at different rates depending on its holding period and investment type. Each state determines this tax; some don’t impose sales tax while others do.
Investors can avoid capital gains tax by investing the proceeds from selling bullion into another asset of equal value – known as a 1031 exchange – within certain time limits and following certain procedures. Otherwise, long-term capital gains would be taxed at a higher collectibles rate of 28 percent – similar to how art or vintages are taxed.
Taxes on Income
Investors selling physical gold or silver bars or coins for more than their original purchase price will usually owe capital gains tax. The same holds true when selling shares in ETFs and mutual funds which invest in gold mining companies.
Tax obligations depend on your tax bracket and duration of possession before selling precious metals such as gold. When considering inheritance or gifts of gold, use its cost of acquisition when calculating any potential gains or losses to determine your taxable gain or loss.
Hold your gold for more than one year before selling it if you want to avoid paying capital gains tax, as that will put it under long-term capital gains rates, which are generally lower. Furthermore, using a 1031 exchange can defer your obligation for paying taxes upon sale.
Taxes on Collectibles
Collectibles tend to carry higher tax rates than capital gains on other investments and can often exceed even the average income tax bracket, making this investment particularly appealing to high-income individuals – yet potentially problematic for some investors as well.
Trading gold or owning an exchange-traded fund (ETF) must be reported and settled with the IRS, but doing so often involves less hassle than selling physical precious metals since these don’t need to be stored and insured.
Gold mining stocks such as those held by Sprott Physical Bullion Trust (OUNZ) do not qualify as collectibles and qualify for long-term capital gains rates if held over one year; if sold within that year they’re considered short-term gains; in this case you must also report any losses on these shares to the IRS.
Taxes on Exchange Traded Funds
Investors who invest in precious metals through exchange traded funds (ETFs) that hold physical quantities of gold should note that the IRS classifies such investments as collectibles and taxes them at a higher maximum capital gains tax rate of 28%. Therefore, it’s imperative that they maximize their portfolio and take steps to minimize overall tax liabilities by taking smart decisions when building their portfolios and make informed choices to minimize tax obligations.
Investors should understand the effects of their investment goals and risk tolerance on how they invest in gold. Working with a financial advisor may help investors make the most out of their gold investments.
Investors looking for tax advantages when investing in gold exchange-traded funds (ETFs) should select those holding physical bullion or offering investors redemption shares for bullion coins; these funds must still be reported and cost-basis calculated correctly when selling them.