How Do I Avoid Capital Gains Tax on Gold?
If you are considering investing in gold, there are a few important points you must keep in mind. Capital gains tax (CGT) must also be understood.
The Internal Revenue Service imposes taxes on physical precious metals at a maximum rate of 28% as collectibles; however, there are various strategies available to you in order to minimize your tax burden.
One way is investing in bullion-backed exchange-traded funds (ETFs). This method offers some tax benefits.
1. Hold onto it for at least a year.
Gold can provide investors with several advantages, ranging from protection from inflation and long-term wealth growth, to potential capital gains tax (CGT) liabilities. Unfortunately, investing in gold may incur capital gains tax charges when sold, however.
Capital gains taxes are applied when an asset is sold at a profit and added to an individual’s income tax slab. Calculation of this taxable amount includes taking its fair market value at time of sale minus original cost basis to arrive at an estimate for tax.
To reduce CGT liability, it is wise to hold onto physical gold investments for at least a year before selling them – this way the IRS will treat their sale as long-term gains and apply a lower tax rate. A financial advisor can assist in optimizing investments to reduce tax liabilities; perhaps investing gold through a self-directed IRA or SEP-IRA might be best.
2. Invest in a tax-free bond.
Precious metals are classified as capital assets, so any capital gains tax payable depends on how long you own and dispose of the precious metals.
CGT typically applies when you sell gold at a higher price than its initial cost basis, which will then be subtracted from its sale price to determine your taxable capital gain.
However, there are ways you can postpone paying the Capital Gains Tax bill. One solution is reinvesting sales proceeds by buying more physical gold or investing them in tax-saving bonds. Another approach would be taking out a gold loan with an accredited non-bank lender such as IIFL Finance to avoid paying CGT on precious metals; loans can easily be obtained using digital procedures with minimal documentation requirements.
3. Invest in a tax-free mutual fund.
Physical gold has long been considered an asset with lasting value and safety as an investment vehicle, but when tax season rolls around it may come as an unpleasant shock for investors who’ve made gains on precious metal investments.
Whenever you sell physical gold, capital gains tax (CGT) applies on any difference between its selling price and purchase price. This is because gold is considered by the IRS to be collectible item subject to higher rates than other assets considered investments.
One way to avoid paying Capital Gains Tax on gold investments is through tax-free mutual fund or IRA accounts, which allow your money to grow without being hit with an expensive tax bill when selling off the gold later on. Furthermore, this strategy could help prevent you from having to pay CGT when inheriting or receiving gold jewelry or coins as gifts from inheritance or gifts.
4. Invest in a tax-free ETF.
A precious metals ETF is an ETF which invests in physical gold bullion as part of its portfolio, and as with any commodity ETF it is taxed at either maximum long-term capital gains rate of 28% or ordinary income depending on personal tax brackets.
Physical gold gains are taxed similarly to collectibles, with profits subject to the higher maximum collectibles rate and losses being offset against capital gains – potentially decreasing after-tax returns for many investors.
An alternative way of deferring taxes may be the 1031 exchange, which allows investors to reinvest the proceeds of a gold sale into another investment asset without paying taxes on both sales. Unfortunately, this option comes with specific requirements that may reduce its effectiveness for most investors. Ultimately, however, tax planning with help from an experienced financial advisor is the best way to reduce liability and thus minimize tax bills.