How Are Gains on Gold ETF Taxed?
Gold ETFs can make an attractive addition to any portfolio, but be wary of their tax implications. The IRS taxes precious-metal ETFs differently from stocks and bonds; treating them as collectibles liable to an increased capital gains tax rate of 28%.
Tax treatment of investments won’t dissuade most investors, but knowing more can help prevent surprises at tax time. Here’s how.
Gold ETFs, like any commodity fund, are taxed differently than stocks. Although they trade on stock exchanges like any other investments do, returns from gold ETFs differ as their returns are treated under different categories due to being backed by physical precious metal, according to Jasani. Gains on SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), two of the largest gold funds, are considered gains on collectibles as they invest directly into physical gold bullion rather than futures contracts – investors receive K-1 partnership tax forms with 1099s that must pay capital gains taxes in accordance with that year’s capital gains tax slab.
At 30-35% long-term capital gains (LTCG), gold investments incur much higher after-tax profits than stock and mutual fund investments, which can significantly diminish total return. When considering all associated costs – such as storage fees, buying/selling charges and annual maintenance fees – of owning physical gold, it may be more economically prudent to purchase an ETF not backed by tangible precious metal.
Investment through an exchange-traded fund (ETF) is an easy and cost-effective way to access gold, offering lower storage, insurance and shipping prices than purchasing physical metal directly. But ETFs incur fees which reduce net assets per share and funds must sell some assets to cover these expenses – each sale incurring tax consequences to shareholders.
Gold ETFs that invest in physical bullion, such as State Street’s SPDR Gold Shares and iShares Gold Trust, are classified as collectibles for tax purposes – similar to stamps, antiques and gems – meaning their gains are taxed at up to 28% instead of the standard capital-gains tax rate of 20% for stocks.
ETFs that invest in futures contracts for gold, such as VanEck Merk Gold (OUNZ), do not incur storage and shipping expenses, yet still incur expenses that must be met in cash. Realizing those proceeds requires selling some futures contract holdings which then become taxable at short-term rates instead of long-term rates as is typical with other commodities.
Tax ramifications of ETFs can often leave new investors bewildered. With trading apps like Robinhood and Webull making investing easier than ever before, it is crucial that newcomers understand how their trades are taxed.
Gold ETFs differ significantly from physical gold investments in terms of taxation. While buying physical gold may appeal, be mindful of any costs related to storage, insurance or any other associated with holding on to it.
Understanding how gains on ETFs are taxed can help you make smarter investment decisions and avoid surprises down the road. Although tax matters might seem boring, understanding their ramifications is essential to long-term investment planning success – otherwise you could end up paying much higher rates than anticipated and negatively affecting your returns. Therefore it would be wise to consult a tax professional so as to get everything right from the beginning.
As global markets have rebounded, many investors have taken an interest in trading ETFs and stocks on apps such as Robinhood. Understanding your tax obligations is vital in order to maximize returns from your investments.
Physical gold ETFs represent ownership in precious metal, so when you sell one it’s like selling the precious metal itself – this differs from mining ETFs or futures-based ETFs which represent shares in a mining corporation.
Futures-based ETFs typically treat paper profits as 60% long-term and 40% short-term capital gains, with unrealized profits marked to market at year end. Unfortunately, their returns tend to be less appealing than IRAs or physical gold held directly by investors – making these less attractive options in most cases.
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