How Are Gold Investments Taxed?
Investors looking to diversify their portfolio with precious metals have various options available to them in terms of diversifying with precious metals investments; each investment vehicle may have different tax implications.
Physical gold and other collectibles are generally subject to higher collector’s rates than long-term capital gains taxes; however, ETFs backed by physical gold trade like stocks and are subject to regular capital gains taxes at 28%.
Long-Term Capital Gains
Physical gold investments such as coins and bullion are taxed at an exceptionally high maximum rate of 28% when taxing long-term capital gains due to their classification as collectibles by the IRS.
However, returns from investments in gold ETFs and mutual funds approved for IRAs are taxed at normal income tax rates; using futures contracts allows investors to take advantage of a lower 20% LTCG tax rate.
Investment in precious metals is tax-efficient when done via an individual retirement account (IRA). ETFs that track gold prices don’t generate K-1 forms or incur PFIC taxes, saving taxpayers money in capital gains taxes.
Short-Term Capital Gains
No legal way exists to avoid paying capital gains taxes when selling gold investments, so any profits should be reported either under Part I of Schedule D for physical gold investments held for less than a year, or Part II for ETFs and mutual funds that invest in precious metals.
Tax treatment of gold investments varies depending on their nature and IRS definitions of long-term and short-term capital gains. Physical gold refers to any precious metal that has monetary value that can be sold.
ETFs and ETNs that hold gold futures contracts are structured as grantor trusts, meaning they’re taxed as partnerships rather than individuals and therefore subject to both 60% long-term capital gains rates and 40% short-term capital gains rates. Individual Retirement Accounts can invest in these assets, increasing after-tax returns significantly; it’s best to consult your accountant or lawyer to optimize these returns and realize maximum after-tax returns.
Shares of Gold Mining Companies
While physical gold investment remains popular, there are also several indirect strategies available to you that allow you to invest in precious metals indirectly. One such indirect investment option is buying shares of gold mining companies; this option is more cost-effective than purchasing and storing actual metal; however there may be taxes related to this form of investing.
If you own shares in a gold mining company and sell them at a profit, the IRS will tax this income as ordinary income since these shares represent ownership stakes in the business itself, not physical precious metal itself.
Physical gold gains are taxed at higher rates than stocks or bonds, which could put off potential investors. But if you hold it for more than one year, its gains qualify as long-term capital gain treatment and be taxed at reduced rates.
Exchange-Traded Funds
If you are interested in investing in gold, there are a few things you should know about how the IRS taxes these investments. Gold has become a popular commodity but be mindful of any tax obligations before making a purchase decision.
If you sell physical gold and make a profit, your taxes will be calculated using your marginal income tax rate. Conversely, if you keep holding onto it and sell later at a reduced long-term capital gains (LTCG) tax rate.
To reduce tax liabilities, to invest in gold is best done through mining stocks or exchange-traded funds tracking the prices. Although this strategy should reduce tax liabilities significantly, you could still be subject to 3.8% net investment income tax if your MAGI exceeds that of an average taxpayer.
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