Capital Gains Tax on Gold
The IRS classifies gold coins as collectibles, meaning any profits from selling them will be subject to a maximum tax rate of 28%. Fortunately, there are ways you can minimize this tax bill.
Before purchasing precious metals, the first step should be establishing their cost basis. This is the original cost that you paid.
What is capital gains tax?
As an investor, you should understand capital gains tax (CGT) and its effect on profits. CGT applies when selling assets such as second homes, stocks or businesses – including gold bullion. Note: the IRS categorizes non-legal tender gold bars or coins as collectibles for income tax purposes which means they’ll be treated differently from other investments.
If you sell physical gold investments such as coins and bars for profit in less than one year, they will be taxed according to short-term capital gains rates which mirror ordinary income taxes and range from 10%-37% for single filers. Conversely, holding on for longer will incur preferential long-term capital gains taxes of between 15%-28% depending on your income level.
Investors can also realize a reduced tax rate by moving physical gold investments to an IRA account, where any profits will be taxed at ordinary income rates (currently 0%, 15% and 20%) instead of at full capital gains rates of 35%, 28% or 31% respectively. Any losses can even be carried forward to offset future gains.
Long-term capital gains tax
Capital gains tax depends on your type of investment and length of ownership. Gold investments held for more than a year qualify for lower long-term capital gains rates than short-term rates. You may be able to offset gains from gold investments using losses experienced within that tax year or carryover losses, which you could offset with any gains experienced through short sales in other investments that year.
Keep accurate records of your gold investments, such as purchase prices, dates of acquisition and sales prices. This will enable you to calculate the cost basis required for capital gains tax calculations as well as document any associated expenses such as storage or insurance costs, which you can then deduct from your cost basis calculation.
Another way to lower your tax liability is through a 1031 exchange, which enables investors to reinvest the proceeds from one investment into another asset without creating a taxable event. A licensed financial advisor can guide you through this complex strategy.
Short-term capital gains tax
Physical precious metals, like other tradable assets, are subject to either short- or long-term capital gains tax rates; however, since physical precious metals are considered collectibles they receive a maximum capital gains tax rate of 28%. There are ways, however, to minimize taxes when making gold purchases or investments.
Hold on to your gold coins for at least one year before selling them; this will qualify them for longer-term capital gains tax rates that are lower than the standard rate of 20%.
Another way is to utilize a 1031 exchange in order to postpone taxes on profits, enabling you to reinvest them without incurring taxable events or incurring a taxable event.
Additionally, any capital losses on other taxable assets may be offset against gold investments to reduce your overall tax liability. As the rules around this strategy may differ depending on where you reside, it is wise to consult a professional financial advisor in order to comply with local laws.
Tax-free gold
Gold can be an asset worth adding to your investment portfolio, but it is crucial that you understand its taxation implications in order to make informed decisions regarding which kind of gold to invest in and for how much.
Taxes associated with gold investments can be broken down into two main categories, capital gains and collectibles taxes. Since physical gold falls under collectible status for taxation purposes, its sale often triggers higher collectibles tax rates compared to ordinary capital gains rates.
However, there are ways around this problem. One strategy is investing in funds that do not purchase physical gold in order to avoid paying the higher collectibles tax rate. Another tactic is using a 1031 exchange, which allows investors to postpone capital gains tax by rolling over proceeds from one investment into a different investment within a set timeframe and deferring it until later on.
Categorised in: Blog