How Are Gains on Gold ETF Taxed?
Gold ETFs offer an effective way of adding gold to your portfolio, but it’s essential that you understand their tax implications before investing.
Gold ETFs may be subject to different tax treatments depending on their structure, such as being classified as trusts which will be taxed at the 28% capital gains tax rate for collectibles.
Gold ETFs that use futures contracts enable investors to leverage their positions, as small changes in price can have large-scale effects.
Physically-backed ETFs that hold actual metal can be considered collectibles by the IRS and subject to its top 28% capital gains rate for long-term gains. ETFs that don’t hold physical metal, but instead follow an index are taxed differently.
Capital gains taxes pertain to any value an asset has gained due to changes in the market without any effort on your part, such as stocks or properties you purchase, while dividends from mutual funds and other investments are taxed as ordinary income. Short-term gains tend to incur a higher tax rate than long-term ones – when investing in gold ETFs it is important for investors to consider this before purchasing one.
Physically Backed ETFs
Physical exposure to gold is provided through exchange-traded funds like State Street’s (GLD) and iShares’ (IAU), though due to IRS treatage of them as collectibles they will be taxed at a capital gains rate of 28% upon sale of shares.
ETFs offer an affordable alternative to investing in physical gold, which requires costly storage and insurance costs, with lower bid/ask spreads when buying and selling than does physical gold. Furthermore, most gold ETFs can be held within an IRA account to enhance after-tax returns.
investors should seek tax advice before investing in any ETF or ETN to understand its tax ramifications, especially if trading futures contracts is involved. Futures contract-invested ETFs issue K-1 forms; ETNs use 1099 forms instead. Alternatively, those interested in precious metals without futures trading could consider ETNs tracking commodity prices, which don’t need K-1 forms and are taxed at standard long- and short-term capital gains rates.
Gold and silver are considered collectibles by the IRS, meaning any gains from jewellery, coins or bars made of physical precious metals are subject to a maximum capital gains rate of 28 percent – more than twice what is generally assessed against most long-term investments (15-20 percent).
Gains on ETFs that track precious metal prices are taxed at ordinary income rates when sold, since they do not fall within the definition of funds that own physical precious metal assets. Investors should report such gains on their annual information return form 1099-A.
Investors can offset these types of gains with unrealized capital losses from other investments, for instance if your portfolio contains unrealized stock losses; this may help lower taxes paid on ETFs. Furthermore, you might consider purchasing sovereign gold bonds (SGBs), government-backed securities that offer interest at 2.5 percent annually.
Gold ETFs backed by physical bullion are often available within an Individual Retirement Account (IRA), providing tax advantages to investors. Any gains accrued in an IRA won’t be taxed until distributed as cash; once sold, gains will be subject to regular income tax rates and potentially the 3.8% net investment income tax (if MAGI exceeds certain thresholds).
Gains on gold coins and bars as well as exchange-traded funds that track them are generally taxed as long-term capital gains; however, annual costs associated with owning such investments vary by type and can reduce after-tax returns significantly.