How Are Gold ETFs Taxed?
Gold ETFs provide an easy way for investors to gain exposure to this precious metal, but investors should be wary of any tax implications related to physically-backed ETFs.
Physically-backed ETFs that track metal bullion are taxed as collectibles and subject to top 28% long-term capital gains rates when sold; other forms of gold ETFs using futures contracts may be treated like common stocks when taxed upon sale of their shares.
Physical ETFs differ from typical exchange-traded funds (ETFs) by holding actual securities that comprise their indexes, while synthetic ETFs track an index through derivatives such as swaps.
Physically-backed precious-metal ETFs are considered collectibles for taxation, meaning investors face a top long-term capital gains rate of 28%; significantly higher than the 20% applicable to stocks and bonds.
Equity-based commodity ETFs may help mitigate some of the same tax concerns associated with physically backed ETFs by owning shares associated with particular metals instead, thus eliminating some withholding taxes that apply to futures-based ETFs. They typically operate through grantor trust structures that permit dividends to pass-through without being subject to withholding taxes; however, such ETFs could still expose investors to counterparty risks through their ETF provider’s securities lending programmer unless fully collateralized to protect investor assets.
Commodity ETFs that own futures contracts – like SPDR Gold Shares (NYSEArca: GLD) and iShares COMEX Gold Trust (NYSEArca: IAU) – follow a mark-to-market rule at year-end to pass any unrealized gains back through to investors, taxed at 60/40 long/short rates as with individual stocks and mutual funds.
Physically-backed commodity ETFs such as IAU and SLV are considered collectibles by the IRS, meaning their sale will incur long-term and ordinary income tax rates of 28% when sold. Furthermore, these funds typically issue Form K-1 to shareholders and report sales via 1099s.
GDX is one of the most sought-after commodity ETFs, giving investors access to companies mining precious metals. Operating as a grantor trust allows investors to receive Form K-1 tax forms each April when reporting sales through 1099s; furthermore, this structure helps GDX avoid double taxation as opposed to holding physical bullion itself.
When investing in ETFs, it’s essential that you understand how your gains will be taxed so as to avoid unexpected surprises and plan more efficiently. Being aware of how your taxed gains will be distributed allows for this information.
Example: If you invest in physical gold-backed ETFs that invest in precious metals and sell them after one year for $3,000, long-term capital gains taxes would apply at a maximum tax rate of 28%. Conversely, traditional stock ETFs would only incur 15% long-term capital gains taxes on any profits realized from selling your investment.
Physical-backed ETFs should also be noted as collectibles for tax purposes, meaning you should anticipate to pay higher taxes than with other investments. It’s therefore especially crucial when making these types of investments to consult a knowledgeable tax professional as this could alter their returns significantly after taxes have been deducted. In addition, minor details could alter this investment’s after-tax returns significantly as well.
Gold ETFs may offer greater tax efficiency than physical gold or SGBs, however the IRS classifies coins backed by physical precious metals as collectibles and applies an excise tax rate of 28% when they sell them.
Investors in these products should keep an eye on their annual information returns, which outline all tax reporting obligations they owe for that year. A qualified tax professional can assist investors with this report.
Investors must also consider the ongoing expenses associated with commodity ETFs. A mutual fund that invests in gold ETFs might incur fees for management and handling that could reduce returns, unlike physical gold investments which don’t incur expenses like GST, labour charges and storage. But investing in physical gold requires various upfront charges such as opening a demat and trading account, transportation and insurance charges among others.