Is Investing in Gold a Tax Write Off?
Gold investments can make an excellent addition to a well-diversified portfolio, but costs and fees vary according to investment types and could erode post-tax returns.
Tax planning is an essential element of investing success, and finding an advisor in your locality who can optimize investments to reduce taxes is a must. Reach out now and connect!
Collectibles
Physical gold investments are taxed at a higher rate than other investment assets, due to the IRS treating physical gold investments as collectibles and taxing them at up to 28%. To reduce their tax bill, investors are advised only to make physical gold investments that they plan on holding for at least one year.
Investment in precious metals via mutual funds or ETFs offers another means of direct exposure, with solid before-tax returns that also avoid collectors tax rates of 28%.
Investors looking for exposure to precious metals mining companies may consider purchasing shares of precious metals mining companies instead of physical coins or bullion investments, though this option won’t provide as much metal exposure. Furthermore, tax payers with higher MAGIs will incur a 3.8% net investment income tax on this form of investment – thus prompting financial and tax professionals to consult on such options when considering this form of investing.
Mutual Funds
If you prefer not to invest in physical gold or are concerned about storage and shipping security, an indirect approach could be better suited. Mutual funds and exchange traded funds (ETFs) offer low initial investments while providing wider exposure to the market than bullion alone.
ETFs and mutual funds offer lower fees compared to investing directly in gold. You can invest in either ETFs that invest directly in the metal itself or stocks of companies mining it – giving you exposure to this industry with reduced risks than investing directly.
Gold’s historical price stability, low inflation-adjusted correlation with other asset classes and rising popularity during times of economic and political unease make it an appealing investment option. Unfortunately, its price volatility can be difficult to manage over the long term while not producing dividends limits your total return potential.
Exchange Traded Funds (ETFs)
Gold investments are subject to capital gains tax rates similar to any other investment, although the exact amounts depend on both how much is made and for how long. Single taxpayers who earn over $106,350 and couples earning more than $178,650 pay the highest capital gains taxes rates.
ETFs that track metal prices provide investors with exposure to physical gold and silver without actually redeeming these securities for precious metals themselves. Unfortunately, these funds incur management fees and custodian charges which reduce after-tax returns from your investment.
Investors should carefully consider the implications of fees when choosing their investment type. For instance, annualized after-tax returns differ between gold coins and ETFs by approximately 1 percentage point due to gains on gold coins being subject to a higher collectibles tax rate – these higher rates diminish after-tax returns but losses can offset gains and lower tax liability.
Futures
Financial derivatives such as futures allow investors to speculate on the price of an asset without ever taking physical delivery of it – whether that be anything from commodities and stocks indexes to other financial instruments like futures contracts. Most positions are closed before their expiration dates have come and gone, however.
These contracts are exchange-traded, regulated and feature standard contract specifications – quite unlike forwards that trade over-the-counter with often customized terms agreed between two parties.
Traders use futures contracts as a hedge or speculate against prices in various markets, including agriculture commodities like soybeans, corn or wheat; energy commodities like oil or natural gas; precious metals like gold and silver. Futures contracts are “trued up” daily by comparing market value against collateral held in brokerage accounts.
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