Is Investing in Gold a Tax Write Off?

Is investing in gold a tax write off

Gold investments can be an attractive inflation hedge. But your tax liability will depend on whether or not your portfolio includes physical bullion or coins, stocks from gold-mining companies or ETFs/mutual funds with gold assets as assets.

The IRS considers physical bullion and coins to be collectibles, meaning their profits are subject to ordinary rates of taxation up to 28% – something middle-bracket investors will likely find detrimental.

Taxes on Capital Gains

Capital gains occur when an asset sells for more than it cost to purchase, which constitutes taxable income; the exact amount depends on how long you owned the asset; long-term capital gains tend to attract lower tax rates than shorter-term ones.

Capital gains can be calculated by subtracting the selling price from its “cost basis”. This amount represents how much was originally paid, including commissions and fees. You may be able to reduce taxable gains by deducting qualifying expenses such as investment advisory fees or legal costs that lower taxable gains.

Additionally, state and local taxes may be due. Furthermore, you could be subject to the 3.8% Medicare tax which applies to net investment income exceeding certain annual thresholds – this includes capital gains, dividends and interest income – this wealth tax particularly impacts higher-income households; so Dennehy recommends investing precious metals through an indirect vehicle such as an ETF instead of directly.

Taxes on Losses

All investments produce capital gains or losses, depending on how much they appreciate when sold and their initial cost basis. The IRS allows investors to deduct capital losses from their taxable income.

Investments sold from taxable accounts generally generate capital gains or losses, while those sold from tax-advantaged accounts such as an IRA or 401(k) generate ordinary income taxation. Gains or losses may be classified either short-term or long-term depending on how long they’ve been owned, with net short-term gains taxed at ordinary rates while net long-term gains qualify for preferential capital gains rates.

Smart investors recognize the value of harvesting investment losses to offset future gains, and recognize that using short-term losses to offset long-term gains can save more money due to tax rates being higher on them. This strategy may prove particularly valuable should an investor expects to move into a higher tax bracket (through work promotions perhaps), or when the IRS raises capital gains taxes rates.

Taxes on Exchange Traded Funds

ETFs operate similarly to mutual funds and are subject to similar tax regulations as stocks. When an ETF that holds equity or bond assets is sold at a profit, any gains are subject to ordinary income tax rates of between 0-20%; for long term capital gains tax benefits up to 23.8% plus 3.8% National Insurance Index for High Earners).

However, commodity and precious metal ETFs present unique tax challenges. Since these ETFs invest in futures contracts that do not back physical metal as grantor trusts would, the IRS requires them to mark-to-market all outstanding futures contracts at the end of every year using their 60/40 rule; where 60% of gains are taxed at long-term rates while 40% may be subject to short-term rates resulting in volatile cash flows that impact investment returns and potentially decrease returns over time.

Taxes on Physical Gold

Many investors choose gold investment as an effective hedge against inflation and safe haven during geopolitical unrest, however the IRS tax rules for physical gold investments can significantly diminish an investor’s after-tax return.

Physical gold investments such as coins and bullion are classified by the IRS as collectibles and are taxed at a maximum collector’s rate of 28%, significantly higher than both long-term capital gains rates of 15% and their maximum rate of 20% for most taxpayers.

Investment in gold indirectly via mutual funds and exchange-traded funds is more tax-efficient. The total cost of owning an ETF, such as annual maintenance fees, storage charges and buying/selling costs may be lower than owning physical gold, so investors should carefully compare total costs before choosing their gold investment type to maximize post-tax returns. Roth or traditional IRAs could provide an ideal vehicle to do this investment because any gains accumulated will only be taxed at ordinary income rates rather than collector’s rates.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

Categorised in: