How Are Gold ETFs Taxed?
Before investing in physical gold, gold coins or ETFs, be sure to carefully consider any potential tax implications of your decision.
Since Budget 2024, gains from selling ETF units within three years were added to your taxable income and taxed at applicable slab rates.
However, under new rules this benefit has been removed and an increased capital-gains tax rate of 12.5% without indexation will now apply.
Taxes on Capital Gains
Gold ETFs have experienced explosive growth as investors seek protection from inflation and market risk. But investors may be surprised to learn that when selling, long-term profits on gold, silver, and other precious metals may be taxed at much higher rates than on stocks and bonds.
Long-term capital gains (LTCGs) on gold ETFs or precious metals ETPs is subject to an effective tax rate of 28% – more than twice what investors receiving stocks or mutual funds are subject to at 15% top tax rate. When purchasing nonphysically backed gold ETFs that instead hold financial instruments related to it such as futures contracts or options on it, their tax implications become even more complicated.
Investors storing non-physical precious metals ETPs in an individual retirement account are treated differently by the IRS – any gains are not subject to the top 28% collectibles capital-gains rate.
Taxes on Distributions
Investors holding gold ETFs could face various tax rates when selling their profits, depending on which kind they own. SPDR Gold Shares and iShares Gold Trust, for instance, which are physically backed by precious metals are considered collectibles and as such subject to up to 28% federal income tax when sold according to late tax expert Robert Gordon.
Gold ETFs that invest in futures contracts for metal are taxed using a hybrid 60/40 rate; 60% of gains treated as long-term gains while 40% count towards short-term gains regardless of how long the fund has been held.
investors with gold ETFs held in retirement accounts such as traditional IRAs or 401(k)s are subject to different taxes when selling these assets. Investors who withdraw funds in the form of distributions owe taxes based on their ordinary income tax rates for these withdrawals.
Taxes on Short-Term Gains
If you’ve held your gold ETF for more than a year and sold it, expect to pay capital gains taxes on its profits. This is due to IRS laws treating ETPs like stocks with an expected tax rate of 28% or more.
Physical investments in precious metals differ slightly; the IRS considers physical precious metals like coins, bars and jewelry collectibles and taxes any short- or long-term gains at a maximum capital gains rate of 28%.
But not all gold ETFs invest in physical precious metals; many hold futures contracts and options to track gold’s price. While those ETFs do not fall under the maximum collectibles tax rate of 39%, they do fall under the general long-term capital gains (LTCG) rate of 20% which may come as a shocker to investors who expect that short-term gains can be offset against capital losses but this may not always be possible.
Taxes on Long-Term Gains
As with physical precious metals, gains on gold ETFs held for more than one year are taxed as collectibles – unlike stocks or mutual funds which incur long-term capital gains taxes of 28% or lower.
Investors can bypass this higher tax rate by placing their gold ETF investments within an Individual Retirement Account (IRA). Working with a financial advisor, clients can ensure the optimal tax results from their ETF investments.
One way to reduce taxes on gold gains is investing in an exchange-traded fund (ETF) that doesn’t hold physical metal; rather, these ETFs use futures contracts to track the price of specific precious metals – for instance a commodity ETF that tracks platinum will often hold futures contracts rather than physical bullion and should therefore report 60% long-term and 40% short-term gains upon sale of shares.
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