Is Investing in Gold a Tax Write Off?
Gold can be an attractive investment option, yet its pretax gains may not translate to strong after-tax returns. Costs associated with purchasing, storing and selling physical gold bars and coins or investing through mutual funds or ETFs may eat away at returns after taxes have been deducted.
Due to collectibles tax treatment, profits from physical gold purchases carry higher taxes.
Capital Gains
Gold has a low correlation to stocks and bonds, providing your portfolio with diversification during times of economic instability. Gold also serves as a proven hedge against inflation – making it a safe haven asset.
Purchase of physical gold requires commitment. It must be stored safely, with transaction, processing and storage fees possibly being due as well as potential purity verification issues.
The most cost-effective method of investing in gold is through precious metals funds or equities that invest in miners and refiners of gold, or physically-backed ETFs (such as SPDR Gold Shares or the iShares Gold Trust), although their expense ratios can be high; they offer low transaction costs and taxation. You may also purchase futures contracts on exchanges like New York Mercantile Exchange.
Capital Losses
There are various strategies available to investors seeking to invest in gold, from buying physical bullion and owning shares of companies mining the precious metal to owning shares that mine it themselves. Each investment option offers different advantages; therefore it’s essential that investors take their goals and risk tolerance into consideration before making their decision.
Beginners looking to invest in gold should opt for funds or ETFs as the easiest and safest means. These securities represent a standardized amount of the commodity with lower fees compared to purchasing physical bars of metal directly. Some funds track prices directly while others follow an index of mining companies.
Investors may purchase shares of publicly-traded gold mining companies. Their stocks increase in value with rising gold prices, providing a reliable stream of income. But such speculation can be risky; many savvy investors, including legendary investor Warren Buffett himself, prefer investing in cash-flowing businesses instead.
Taxes on Investments
When selling property you own for investment (i.e. properties which produce income such as interest, dividends, annuities and royalties) or working interests in certain types of oil and gas properties, your capital gain or loss must be calculated – this process is called capital gain or loss and applies at ordinary tax rates of 10%-37% respectively for gains; while losses can offset by gains and carried forward to offset future profits.
Tax-loss harvesting is a strategy used by investors to minimize taxes. You can deduct up to $3,000 of capital losses each year from other taxable income, and any excess losses can be carried forward and used against future profits. For more information, see Publication 544: Sales and Other Dispositions of Assets; for instructions for Schedule D on your tax return or software such as TurboTax.
Taxes on Selling
When selling precious metals at more than you paid for them, capital gains tax may apply. Your profit depends on how long it has been held as well as your tax bracket and is best discussed with an advisor prior to engaging in international transactions that require additional documentation and reporting requirements.
Physical gold coins and bars are subject to capital gains tax at 28%; any associated costs such as storage fees, insurance premiums, buying/selling costs etc are also taxed, potentially diminishing returns after taxes have been taken into account.
Gold ETFs and mutual funds are generally long-term investments with lower tax rates compared to physical gold. However, these funds often incur management fees which eat into profits, so it is wise to carefully weigh all options available before settling on one investment type.
Categorised in: Blog