Gold ETFs have become an increasingly popular alternative to buying physical gold. But investors should be wary of any tax implications arising from investing in such funds.
Gold ETF profits become taxable upon sale/redemption unlike most investment products and at higher capital gains rates than other commodities.
Taxes on Capital Gains
Gold ETFs may not provide tax benefits like physical precious metals would. Gains on gold investments that you sell quickly will generally be subject to your regular income tax rate; however, long-term investors can utilize longer-term capital gains rates or offset profits with losses carried over from other investments within that tax year to reduce tax liabilities on any gains realized from holding their gold investments over a longer time.
When it comes to physically-backed precious metal investments such as coins and bars, the IRS treats them as collectibles with an average 28% tax rate according to accountants – this rate is much higher than the 15% long-term capital gains rate applicable to most assets and taxpayers; so working with a gold specialist when planning your taxes is crucial.
Taxes on Distributions
Many investors are familiar with the tax rules surrounding physical gold investments, yet ETFs that track precious metals present some unique complexities when held. Gains on precious metal ETFs that are physically backed are taxed as collectibles with a top capital gains rate of 28%; however investors who hold these ETFs in an individual retirement account avoid this problem altogether.
Other gold ETFs that don’t invest directly in physical commodities instead invest in commodity futures contracts, which means their gains are taxed differently due to being treated like partnerships that own futures contracts – investors get taxed based on an overall ratio of 60% long-term gains to 40% short-term gains; this may be more advantageous for those outside of the 28% capital-gains tax bracket.
Gains on commodity-based ETFs that own futures contracts are reported on Schedule K-1 rather than Form 1099, saving investors paperwork and administrative costs.
Taxes on Physical Gold
Gold ETFs have quickly become a go-to investment option for many investors. Trading similarly to stocks, these commodity funds track the price of physical gold by buying or selling shares of gold-backed assets. Unfortunately, these investments present several tax considerations if their issuer goes bankrupt; furthermore they may not perfectly mirror physical gold prices which reduces returns.
Investors holding gold ETFs in taxable accounts will be taxed annually as with other stocks or bonds; those investing in physical gold or savings bonds, on the other hand, must pay taxes when selling or redeeming them.
Physical gold investment costs tend to be higher than holding ETFs, which can significantly cut into after-tax returns. Investors should compare both options when considering which investment type best meets their needs based on storage charges and buy/sell fees.
Taxes on Exchange-Traded Funds
Gold ETFs trade like shares of stock and provide investors access to physical gold without the responsibility of storage. Or they can be structured as grantor trusts to circumvent commodity taxation altogether.
However, investing in physical gold versus ETFs does have its drawbacks; most significantly that gains made through ETFs are subject to higher tax rates compared with long-term capital gains.
Harish Menon of House of Alpha suggested this may impede investment flows into this category. He highlighted how unlike Sovereign Gold Bonds (SGB) or physical gold, gold ETFs provide decent liquidity with shorter investment horizons.
However, gains on ETFs that invest in futures contracts may be taxed at a hybrid rate of 60% long-term and 40% short-term; that is more than twice the 15% tax rate afforded similar gains from stocks and bonds. Furthermore, tax treatments vary depending on their structure.
