How Are Gold Investments Taxed?
Investing in precious metals is a fantastic way to diversify your portfolio, yet investors should be mindful that different forms of gold investment may incur different taxes.
Physical gold is considered a collectible by the Internal Revenue Service (IRS), much like art or rare stamps. As such, profits from sales of physical gold are taxed at up to 28%.
Long-Term Capital Gains
As with any investment, gold investors pay taxes when making a profit; however, physical gold investments are taxed differently than others.
The IRS recognizes physical gold as a collectible asset and taxes any gains on sales at a maximum rate of 28%; by contrast, gains on profitable sales of other asset classes, including long-term capital gains and short-term capital gains, are taxed at 15% for most taxpayers.
Physical gold investors may incur costs related to its acquisition, storage and insurance that can reduce after-tax returns.
Short-Term Capital Gains
Short-term investments that generate profits are taxed at the same rate as regular income by the IRS, determined based on your income and filing status.
Before calculating capital gain, it’s essential that you know your basis; that is, how much the asset cost when including commissions and fees. With that information in hand, calculate realized amount (what the asset was sold for) minus your basis to determine capital gain.
Short-term capital gains are currently taxed at 10% to 37% depending on your taxable income and filing status, though those rates could change in the future; long-term gains could incur up to a 28% maximum tax rate if investors own collectibles such as precious metals.
Investments in Physical Gold
Physical gold investments such as coins and bullion bars are considered collectibles by the IRS. Their value fluctuates based on changes to the gold market without any effort on behalf of investors, with profits from sales subject to tax at up to 28%.
Investors can invest indirectly in physical gold through various funds, mutual funds and exchange-traded notes that track gold indexes. Taxation on gains realized over a one year period for investments held within an IRA is either zero percent, 15% or 20% depending on income level; potentially providing higher after-tax returns than investing directly.
Investments in Gold ETFs
Many investors opt to invest in gold ETFs instead of purchasing physical gold coins or bars, as this approach often offers lower prices and annual fees than holding physical gold.
Unfortunately, the IRS taxes ETFs like they’re backed by physical gold bullion, meaning gains on these investments are taxed at 28% as collectibles.
High-income taxpayers may see their returns reduced significantly when investing in stocks held within an IRA; on the other hand, gains on such investments are taxed at the regular 15% long-term capital gains tax rate.
Investments in Gold Mining Stocks
When investing in precious metals, the IRS tax rules can be complicated and disorienting for many investors – especially when considering physical gold purchases or bullion-backed exchange-traded funds (ETFs).
If you hold shares of gold mining companies outside an IRA, their shares qualify for taxation at the regular maximum long-term capital gains rate rather than collectibles rate of 28% when sold. You must reinvest profits within 45 days or they’ll be subject to ordinary income rates and subject to taxes as regular income.
Investments in Gold Mutual Funds
Taxation of gold investments depends on the type of investment you choose; whether physical gold, mining stocks, ETFs or even gold ETPs may all have different tax implications when sold.
Physical gold investments such as coins and bars are considered collectibles and subject to tax at a maximum rate of 28%, but investing in bullion-backed ETFs or gold mining stocks may reduce your tax bill as long-term capital gains, offering diversification without incurring extra expenses for buying physical gold.
Investments in Gold Futures
Gold has great sentimental value to many people and represents an attractive investment asset class. Investors should understand its tax ramifications before considering investments in physical gold or ETFs that track it.
Physical gold is subject to a 28% long-term capital gains tax rate from the IRS as it is considered a collectible. Investors selling physical gold must also pay an additional 4% cess.
Investing in gold futures ETFs is a more tax-efficient option. These funds trade like shares of common stock and have low annual fees and storage charges.