Can I Invest in Gold Tax Free?
Gold can be an attractive asset in your portfolio, with its value consistently outpacing other investments. But when the time comes to sell it, the IRS wants a piece of the profits.
There are ways to lower your taxes when investing in gold, read on to gain more knowledge on precious metal investments and their related tax repercussions.
Taxes on Capital Gains
Gold has long been considered an appealing investment option. Many enthusiasts view gold as an inflation hedge or safe haven during times of geopolitical unrest, and physical gold coins and bars may offer robust before-tax returns; however, their gains will be taxed as either ordinary income or long-term capital gains tax rates of 15%-20% depending on an investor’s taxable income.
However, investors holding physical precious metals aren’t the only ones subject to taxes on precious metal investments. The IRS classifies physical gold, silver, platinum and palladium holdings as collectibles that when sold incur taxes of 28% of profit when sold – however a few easy steps can help investors significantly enhance after-tax returns by investing in bullion-backed ETFs within individual retirement accounts – an effective way of sidestepping these expensive capital gains taxes on precious metal investments.
Taxes on Long-Term Gains
Many investors choose gold as an asset class to diversify their portfolios against inflation and geopolitical instability, but paying taxes on this investment could have a major impact on after-tax returns.
Physical gold and ETFs backed by physical assets like coins and bars are classified by the IRS as collectibles and subject to a maximum tax rate of 28%, while stocks and funds that do not own physical assets such as stocks or funds with physical holdings can only incur taxes up to 20%.
These differences may seem minor, but they can become substantial tax bills for new investors starting out. To increase after-tax returns when investing in gold, one approach would be investing via an ETF or mutual fund within an IRA, which sidesteps physical gold taxes altogether; another strategy could involve mining company stocks which offer capital gains tax rates of zero, 15% and 20% like any other investment.
Taxes on Short-Term Gains
Though gold investments may deliver impressive pre-tax returns, investors could be in for an unpleasant shock at tax time. That’s because the IRS classifies physical metal coins and ETFs backed by precious metals as collectibles, subject to tax at up to 28% compared with 15%-20% long-term capital gains taxes that apply to most assets and investment vehicles.
Investors who purchase gold mutual funds, exchange-traded funds or direct physical bullion can sidestep the higher collectibles tax rate by filing an annual Qualifying Electing Fund (QEF) election with each trust to treat the investment as personal property rather than an asset – even though this requires extra paperwork – potentially cutting their tax rate in half!
Taxes on Exchange Traded Funds
Gold can be an attractive asset to include in their portfolio, providing inflation protection and providing safety during times of economic or geopolitical turmoil. But investors must also consider any tax implications of owning precious metals such as gold.
Physical gold such as coins and bars is classified by the IRS as collectibles, so any gains from their investments are taxed at a maximum 28% rate. Investors looking to avoid high tax rates on collectibles may consider gold-backed ETFs which buy massive quantities of physical gold, store it away securely and issue shares that track its price as the value for investors.
There are differences in how these ETFs are taxed; profits from selling gold-backed ETFs held for more than one year may be subject to long-term capital gains rates of 0%, 15% or 20% depending on your filing status and taxable income, while commodity ETFs with futures contracts are taxed according to ordinary income rates.
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