Is Investing in Gold a Tax Write Off?
Gold investments can provide investors with valuable defensive qualities, but investors must be wary of its tax ramifications. Physical gold investments (like coins and bars) are classified as collectibles; therefore any profits from selling these will be taxed at up to 28% rates upon sale.
To avoid paying these higher rates, investors should seek ETFs and mutual funds that don’t invest in physical gold assets.
Collectibles
The IRS considers gold and other precious metals collectibles rather than investments, meaning investors owing taxes when selling them typically face higher taxation than with other investments. Investors holding their precious metals for longer than one year may qualify for long-term capital gains rates of 15%-20% on profits when selling.
Gold investing can be achieved most effectively through bullion-backed exchange-traded funds (ETFs). These ETFs purchase physical gold and store it securely, enabling investors to redeem their shares for bullion as soon as they desire. They have the advantage of being highly liquid compared with stocks; you can trade shares as quickly or more rapidly than stocks can be traded; however, some may incur dealer markups and storage fees which make the ETF less than cost-effective in certain instances.
Investments
Gold can be an ideal investment during times of economic or geopolitical unrest. Due to its low correlation with other assets, owning physical gold may protect investors against losses while increasing returns overall. However, owning physical gold may be costly due to storage and insurance fees; investors can lower these expenses by opting for exchange traded funds (ETFs) that hold physical gold or invest in assets related to the price of gold.
Investment in gold through shares of mining companies can be more tax efficient than direct ownership of physical gold, with gains taxed at the same rate as other stocks instead of at a 28% collectibles tax rate. However, the cost associated with owning these stocks may lower overall returns.
Exchange-traded funds (ETFs)
While gold-backed ETFs may be popular investments among many investors, the IRS considers these collectibles and will tax any profits you make upon selling at a profit at 28% maximum capital gains rate.
Another popular method for investing in gold is through mutual funds that hold physical gold bullion, though this option may be complex and you should consult a tax professional prior to committing.
Gold can add liquidity and diversify your portfolio, but comes with storage costs and capital gains taxes to pay. Furthermore, dividends paid out may need to be taxed as well – all of which reduce return on investment significantly. Luckily, this problem can be easily mitigated through careful tax planning.
Mutual funds
Many investors choose exchange-traded funds (ETFs) as an investment vehicle for gold investments, since these ETFs track precious metal prices and can be traded on major stock exchanges. ETFs have lower expenses than physical gold investments and can provide an easy way to make large purchases quickly – however they might not always be best suited for each taxpayer.
Gains from collectible investments are subject to long-term capital gains taxes at 15%; however, their returns are taxed at an increased maximum collectibles rate of 28% compared to other assets’ 15% long-term capital gains rates.
Some ETFs that specialize in precious metals have attempted to get around this challenge by reclassifying themselves as passive foreign investment companies; one such ETF is Sprott Physical Gold Trust, which claims its structure allows U.S. individual investors to qualify for the 15% maximum capital-gains tax rate.
Options and futures contracts
Futures contracts allow traders to gain exposure to commodities like oil, gold and orange juice. Furthermore, traders can trade financial assets such as indices and stocks using futures contracts.
Futures contracts are standard contracts used to buy or sell commodities at a specific date in the future. Buyers are required to purchase assets on that day while sellers must sell.
Option buyers pay an option seller a premium in exchange for the right, but not obligation, to buy or sell futures contracts based on price movements of an underlying asset. Futures trading involves considerable risk and isn’t suitable for everyone; therefore it is crucial that before starting trading it’s essential that all involved understand how this form of investing works and its associated risks.
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