How Are Gold ETFs Taxed?
Gold ETFs can provide an effective means of diversifying your portfolio; however, investors must understand how their tax obligations apply.
Physical gold and ETFs backed by physical gold are treated as collectibles and subject to tax at a top 28% capital gains rate, but ETFs not structured as trusts with physical gold can avoid this tax burden.
Taxation of long-term gains
Since war, inflation, and stock-market volatility are compelling investors to seek safe haven investments, gold ETFs have emerged as one of the hottest options this year. Investors should keep in mind that metal coins and physical precious-metal ETFs are taxed by the IRS as collectibles; any profits earned through such investments are taxed at a higher rate than stocks, bonds or other forms of assets.
Gold ETFs offer investors an easy and cost-effective alternative to physical gold bullion ownership, trading similar to common stocks with low transaction costs for buying and selling shares. Each share represents one tenth of an ounce of physical gold; however, gains on these ETFs are taxable at the top 28% capital gains rate compared to physical gold investments.
Gains from gold ETFs that hold physical gold are taxed as collectibles and subject to an additional 28% rate. Investors should take note of their cost basis when considering whether or not to sell their investments; this will determine their liable for taxes when selling off these investments.
Taxation of short-term gains
Gold ETFs provide investors with an easy and hassle-free way to purchase, store and sell physical gold without the hassle or storage costs that traditionally accompany such investments. Furthermore, indirect taxes such as labour charges or purchasing/selling fees may reduce after-tax returns significantly.
Gold ETFs present more complex tax implications than other investments, unlike stocks and bonds which typically fall within the 0% to 20% capital gains rate range, gold is taxed at a much higher 28% capital gains tax rate as collected items by the IRS.
For investors holding precious metal ETFs in taxable accounts, this high rate can present particular difficulty; long-term profits will incur the top 28% capital gains tax rate. Thankfully, you can sidestep this difficulty by investing your precious metal ETFs within an individual retirement account (IRA), which will give you greater after-tax returns.
Taxation of dividends
Gold ETFs provide an economical alternative to buying physical gold and can be an attractive investment option for those unable to cover upfront costs associated with owning it directly. Investors should keep in mind that expenses related to ETFs could eat into profits significantly.
The IRS considers precious metals collectibles, so ETFs backed by them must be treated as such if sold within three years. Furthermore, gains on gold ETF sales are subject to long-term capital gain tax rates rather than regular income rates when sold after this timeframe.
Investors can lower the tax bill associated with their gold ETF investments by holding them in retirement accounts such as an IRA or 401(k). By deferring tax payment until withdrawal occurs, withdraws will only be taxed according to an investor’s ordinary income tax rate.
Taxation of distributions
Investors looking into gold exchange traded funds (ETFs) should carefully consider their tax ramifications prior to investing. The IRS considers ETFs not structured as trusts backed by precious metal as collectibles, meaning investors will face a maximum long-term capital gains rate of 31.8% (including the NIIT). By contrast, ETFs that invest in stocks of gold mining corporations are treated as equity investments and thus should be taxed as such.
Many commodity ETFs, including gold ETFs, are structured as partnerships which hold futures contracts and distribute profits via Schedule K-1 to investors. This structure allows funds to avoid having to report both short- and long-term gains when selling futures contracts, but requires paying a hybrid 60/40 tax rate on realized gains.
Some gold ETFs that invest in gold miners use leverage to magnify market movements, potentially yielding larger returns; however, these ETFs tend to have higher short- and long-term capital gains rates compared with non-leveraged ETFs.
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