How Are Gold ETFs Taxed?
Gold bars and coins provide tangible assets that can be physically held, while Exchange-Traded Funds use futures contracts to track gold price movements. Depending on their legal structure, these funds may be subject to different tax regulations.
Physically-backed metal ETFs such as SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and Aberdeen Standard Gold ETF Trust (SGOL) are taxed similarly to collectibles, with gains on sales subject to the 28% capital-gains tax rate for collectors.
Taxes on Short-Term Capital Gains
Gold exchange-traded funds (ETFs) allow investors to gain exposure to precious metal without needing to store it physically, but investors should note that gains from such ETFs are subject to the same tax rules as investments in physical gold bullion.
The IRS considers physical investments in gold and other precious metals to be collectibles, so profits derived from such investments are subject to a maximum capital gains rate of 28% instead of the standard long-term or short-term rates that apply to other investment assets.
This issue does not pertain to most gold ETFs, such as SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Standard Gold ETF Trust (SGOL), but may apply to commodity ETFs that track the price of specific metals like gold. Typically these ETFs require their shareholders to receive a K-1 form when selling shares and are taxed at their highest collector rate.
Taxes on Long-Term Capital Gains
Tax law classifies physical gold investments as collectibles and profits on sales/redemption are taxed at up to 28% – significantly higher than the 15% long-term capital gains tax rate applicable to most other assets and taxpayers.
ETFs that don’t hold physical precious metals are treated by the IRS like securities and any long-term profits are taxed at individual’s ordinary income tax rates. Furthermore, any futures contracts held by ETFs that generate profits must also be taxed at these ordinary rates.
Taxes may eat away at after-tax returns on gold investments. To minimize them, smart overall tax planning and investing in ETFs that hold physical precious metals rather than futures contracts is often effective in mitigating this tax burden. Your financial advisor can assist in both these strategies.
Taxes on Dividends
Investors holding gold ETFs that track physical precious metal prices in taxable brokerage accounts face different tax rules than investors investing in stocks of gold-adjacent businesses or futures contracts. Physical gold investors are subject to tax as collectibles while those investing in futures-based ETFs that don’t physically hold it must pay ordinary income taxes on short-term profits.
Even if their holdings are identical, there can be variations in tax rates between ETFs. Investors selling physical gold or gold-backed ETFs within 12 months must pay short-term capital gains rates which can reach as high as 37 percent; those outside an IRA owning precious metals ETFs outside an IRA must also pay an annual net investment income tax of 3.8% with higher bracket taxpaying investors paying an increased 3.8% net investment income tax rate which reduces their after tax returns compared with returns available from other forms of investments.
Taxes on Options
Gold investments encompass stocks in gold mining companies as well as ETFs that track various gold commodities. Like any stock investment, gains on these gold ETFs may be taxed at traditional capital-gains rates depending on how long investors own them before selling them; physical gold coins or ETFs purchased with costs like storage fees and insurance can be added into their cost basis to reduce future tax liabilities.
Long-term gains on ETFs that track precious metals are generally taxed at the collectors’ rate instead of the 28% capital gains tax rate typically applied to other investment types. However, this can vary depending on whether an ETF invests in physical gold directly or through derivatives like futures contracts – so investors should consult both an investment and tax professional when making this decision.
Comments are closed here.