How Do You Avoid Capital Gains Taxes on Gold?
There is no clear-cut answer to this question as it depends on where and what kind of gold is purchased, however smart tax planning may help lower capital gains taxes and save on potential taxes on capital gains.
The Internal Revenue Service defines capital gains as any increase in asset values relative to its original purchase price, both short-term and long-term profits.
1. Buy from a reputable dealer
Gold investors may not realize all of the associated costs with owning precious metals, including dealer markups and storage fees for physical bullion as well as management and trading fees for gold ETFs. Investors may also owe capital gains tax when selling their metals.
All sales of precious metals must be reported to the IRS, with capital gains taxes depending on how long you held on to the asset and your income level. Physical bullion is classified as collectibles by the IRS and can be taxed up to 28%; investing in funds that do not own physical gold may help avoid this high tax rate; these types of investments generally are taxed at either 15% or 20% depending on income levels.
2. Don’t buy from whoever’s selling
Trustworthy dealers should always be your go-to choice when purchasing gold. A knowledgeable seller will have an understanding of its market value as well as how best to store and protect it as an investment.
Precious metals are classified by the IRS as collectibles and may therefore be subject to capital gains tax (CGT), unlike investments like stocks and bonds that you could purchase or trade.
CGT (Capital Gains Tax) is an investment tax that must be paid on profits made from investments that exceed certain thresholds, in addition to regular income taxes that must be withheld from earnings. Unlike regular income taxes, however, CGT should not simply be calculated according to profit levels but as a percentage of total sales prices.
3. Don’t store your gold in your home
IRS policy treats precious metals as capital assets and any financial gain from their sale as taxable income, with some exceptions; such as when receiving gold jewelry as a gift and later selling it for more than its original fair market value (FMV), as long as your cost basis was equal or below FMV at the time of its gifting.
Storing gold at home is riskier. Selling bullion bars from within your own home is more challenging, while it makes theft more likely. Should someone become aware that there’s gold to steal at your place, they may become more inclined to do just that out of greed or simply as an act of opportunity.
4. Don’t sell your gold for cash
Gold coins and bullion tend to gain in value over time, offering an important asset during times of economic instability. However, it should not be used as an alternative way of diversifying internationally.
Gold is an exceptional conductor, which explains its wide-spread use in electronics devices like phones and computers that you use every day. You might be amazed to discover that your favorite device contains gold – you might be amazed to learn it’s in there somewhere!
When selling gold jewelry or other items, be careful. Be sure to compare rates and look for dealers with a pawn shop or second-hand dealers license before taking your item to a dealer. Use a kitchen scale at home to weigh your item before checking its karat and price per troy ounce before visiting any dealers.
5. Don’t invest in gold stocks
Many investors turn to gold investments as a way of diversifying their portfolio, in order to protect it against inflation, geopolitical risk and economic recession.
Physical gold comes with one major drawback: its gains are subject to taxes at a 28% long term capital gains tax rate – significantly higher than most long term investments which only incur 20% long term capital gains taxes.
There are ways to lower the tax liability associated with gold investment. By following a few simple tips, you could keep more of your profits out of government hands. Consult a financial advisor if possible as they may assist in creating a strategy tailored specifically to you and your situation.