How Are Gold Investments Taxed?
Investors can gain exposure to gold through various vehicles, with each option potentially carrying different tax implications.
Physical gold investments are considered collectibles and subject to a maximum 28% capital gains tax rate upon sale, but investing in mining company shares or gold-backed ETFs may provide investors with lower long-term capital gains tax rates.
Capital gains taxes must be paid when purchasing physical gold and selling it for a profit, depending on your tax bracket. Therefore it is wise to seek advice from an accountant as soon as possible regarding this transaction.
When receiving gold as a gift, your cost basis will be the fair market value (FMV) at the time it was given to you. Capital gains taxes only apply if the selling price exceeds this original FMV.
Physical gold investments offer investors several advantages, as these sovereign gold bonds (SGBs) are taxed as investment income rather than capital gains. Unfortunately, this method often incurs additional storage and insurance fees. Still, physical gold serves as an excellent inflation hedge and adds diversification to your portfolio.
As a general rule, profits from physical gold investments like coins or bullion are taxed at the maximum capital gains rate of 28%. You can avoid this if you invest in assets or funds that do not buy physical gold directly – some funds and ETFs such as Sprott Physical Gold Trust (NYSE: PHYS) claim to do this by structuring themselves as foreign investment companies or using obscure rules; for advice please speak with a financial professional.
Taxation of gold mining shares can be complex and variable depending on their structure; ETFs holding futures contracts are taxed like partnerships rather than grantor trusts and subject to a top long-term capital gains rate of 20%; as a result they resemble collectibles more than traditional investments. Individuals selling precious metal investments should factor their cost basis and length of holding time when assessing their tax liability.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs), in contrast to physical gold investments with dealer markups, storage fees, insurance charges and trading costs associated with them, buy large amounts of physical gold bullion in bulk and store it before issuing shares to investors. When these ETFs sell their gold for more than they purchased it at, capital gains taxes will likely apply; rates for this tax vary depending on how long an investor held onto their gold and the IRS collectibles rate of 28%.
Profits from gold mining company stocks and ETFs held for more than one year are generally taxed at the lower long-term capital gains rate, though investors can take advantage of 1031 exchanges to defer these taxes by purchasing assets equal or greater value with proceeds from selling their existing gold and silver investments. Investors who do not qualify can offset capital gains taxes with capital losses generated from precious metal investments.
Tax-wise, the IRS considers physical gold coins and bars, as well as ETFs backed by gold bullion that trade like stocks, as collectibles. When sold at a profit for more than 28% capital gains rate taxation will apply.
Holding precious metals in an IRA doesn’t subject them to taxes until you withdraw the funds; however, profits from selling physical gold held within an IRA are taxed at ordinary income tax rates; which may be higher than long-term capital gains rates for most taxpayers.
Profits from selling shares in gold mining companies or bullion-backed ETFs are taxed at a more reasonable long-term capital gains rate of 15% (20% for high income taxpayers). Even so, this tax relief won’t necessarily spare you of paying an enormous tax bill should your metals turn a profit; they will still use your account’s cost basis as the basis for tax liability when they make a sale.
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