How Are Gold ETFs Taxed?
Gold ETFs provide an easy and straightforward way to diversify a portfolio with precious metals, but their taxes may come as a shock for some investors. Luckily, it is possible to minimize this impact through strategic investing practices.
Tax treatment of ETFs depends on their structure; those organized as trusts are subject to the 28% capital gains rate applicable to collectibles.
Physical backed ETFs
SPDR Gold Shares and iShares Gold Trust ETFs offer investors who wish to invest in physical gold the opportunity to do so through exchange traded funds (ETFs), holding physical gold while tracking its price. These ETFs don’t expose investors to futures-based ETFs and could be an excellent option for those without enough storage capacity to store large amounts of physical gold themselves.
ETFs that are physically backed by precious metals are structured as grantor trusts and treated as owning the asset for tax purposes, but this comes at a cost; precious metal ETFs must pay storage and insurance fees on their holdings.
Profits from selling physical commodity ETF shares are subject to long-term capital gains taxes of 28%; this tax must also be added on top of ordinary income taxes that can reach 38%. Conversely, gains realized from selling commodity ETFs within an IRA account will be taxed at the reduced capital gains rate of 20%.
Futures based ETFs
The IRS classifies precious metals like gold and silver as collectibles, meaning investors face a top 28% tax rate on long-term gains from them. This makes physical gold less appealing than stocks which incur only 15% or 20% taxes for any long-term gains made through ownership or trading ETFs that invest in them.
ETFs that invest in precious metals via futures contracts offer an advantage over physically-backed funds because they do not incur dealer markups and storage fees, although costs associated with trading, management and other fees still exist; as well as risk associated with backwardation/contango which could result in losses on included contracts.
Commodity-backed ETFs (or ETPs), like ETPs that own futures contracts, differ significantly in that they are structured as limited partnerships; investors reporting gains on 1099 forms annually rather than selling shares when selling them is key for avoiding higher taxes imposed by physical bullion-backed ETFs while potentially saving on shipping and insurance costs.
Investors in bullion-backed ETFs can expect to pay a maximum tax rate of 28%, along with liquidity issues and capital erosion if they redeem early. But by opting for PFICs such as Sprott Physical Bullion Trusts instead, investors may save on taxes.
As opposed to gold coins and mutual funds, ETNs don’t require K-1 forms or 1099s upon sale; however, they may still be subject to long-term or short-term capital gains tax rates.
Prior to making any investment decisions involving gold, investors must carefully consider their tax implications. Doing so will allow them to reduce the after-tax cost of ownership while increasing after-tax returns. When consulting a tax professional regarding their options for financial solutions they should also compare annual costs, such as storage fees or buying/selling charges to make sure their money makes the most impactful impactful return possible.
Gold ETFs have grown increasingly popular, yet investors should carefully consider their tax ramifications before purchasing one. Gold ETFs come with multiple costs such as management and storage charges that could significantly diminish after-tax returns. Before selecting an ETF for investment purposes, consult your tax adviser or evaluate your time horizon to assess its suitability.
Additionally, certain gold ETFs do not directly invest in bullion bullion; rather, they trade futures contracts and the IRS treats these ETFs as collectibles at the top 28% capital gains tax rate; this can significantly diminish after-tax returns.
To avoid this risk, investors are recommended to invest in physically-backed ETFs or purchase physical gold instead of ETFs and mutual funds. While ETFs and mutual funds provide lower costs and liquidity benefits – making them attractive to short-term traders through systematic investment plans; furthermore they do not incur wealth tax or GST levied against physical transactions.