When you invest in gold, be it physical or through an ETF, it is likely to increase in value over time – this process is known as capital gain.
How your gains on gold are taxed depends on what type of investment and for how long. Here are all of your options:
Long-term gains
Gold ETFs have become an increasingly popular investment vehicle among investors seeking to diversify their portfolios, yet these commodity funds can present investors with a tax headache. Since they’re based on futures contracts and therefore taxed differently than other securities (collectibles are subject to up to 28% on long-term gains).
Considerations should be given to this higher tax rate when making decisions about your investment strategy, particularly if you intend on selling a gold ETF in the future.
As long as you make smart financial plans, there are ways to lower your capital gains tax bill with effective overall tax planning. One option would be reinvesting any profits from selling gold ETFs within 45 days into another precious metals investment or transfer the profits into either a traditional or Roth IRA to avoid paying any taxes on any gains you realize.
Short-term gains
Gold’s rising price this year has persuaded many investors to add physical precious metals like gold to their portfolios, only for them to discover that profits earned on those investments are taxed at a much higher rate than other forms of investments due to being classified by the IRS as collectibles at 28% maximum rates; stocks from companies mining or processing gold are taxed at standard capital gains rates.
One way to sidestep this tax trap is to invest in gold ETFs and mutual funds that do not purchase physical gold, which are taxed at your marginal rate of income. By holding them in either a traditional or Roth IRA account you won’t owe taxes until withdrawing the funds; plus you’ll gain from long-term capital gains tax (LTCG) benefits after three years.
Tax-advantaged accounts
Taxing gold investments is often complex. To maximize returns while minimizing taxes, consult with a financial advisor beforehand to gain clarity on this aspect of investing.
Physical gold and ETFs that hold it are considered collectibles, subject to an additional maximum tax rate of 28%. ETFs without physical gold holdings do not fall under this top tax rate.
Investors looking to sell gold can offset their gains with losses accrued either in that year or carried over from previous ones, thus significantly lowering taxable income. This strategy is known as tax loss harvesting.
Investment in precious metals can be highly lucrative, but it is essential that you understand how these investments are taxed. By understanding the rules and regulations surrounding their taxation, you can increase your after-tax returns while saving money by holding them in a tax-advantaged account such as an IRA that can double their after-tax returns.
Physical gold
Gold ETFs offer an efficient way of investing in gold, as they trade like shares of stock. Each share represents a fraction of physical gold held by the fund; however, investors should be mindful that they may be taxed differently than investing directly in physical gold.
As physical gold is treated by the IRS as a collectible, its gains are subject to a higher maximum capital gains tax rate of 28% – affecting both direct purchases of bars or coins and ETFs that hold physical gold directly as well as investments that hold physical gold indirectly through ETFs.
If you want to sidestep paying the higher capital gains tax rate, gold exchange-traded funds (ETFs) that invest in gold mining companies could be the way forward. They are taxed at standard capital gains rates which could be much lower than 28% tax rate. For more information regarding taxation of gold consult a reliable financial advisor; Unbiased can match you up with one in as little as 48 hours!
