Gold ETFs trade like stocks and offer convenience, lower transaction costs and less hassle than purchasing physical gold. Investors must consider their tax liability before investing.
Gold ETFs that invest in precious metals are taxed as collectibles, with potential capital gains rates reaching 28%. ETFs investing in futures contracts must report gains through Schedule K-1.
Capital Gains
Gold exchange-traded funds (ETFs) give investors access to physical gold without having to hold physical bars themselves. Usually, these ETFs trade like stocks and have low annual operating fees – often less than 0.4% annually.
Gains from holding gold ETF units for an extended period are subject to tax at the same rates as capital gains from other investments, both physically-backed ones and futures-based ones, held in traditional or Roth brokerage accounts or even individual retirement accounts (IRAs).
But there’s one caveat. Since gold ETFs backed by physical metal are considered collectibles, their gains when sold will be subject to the top 28% capital gains rate for collectibles – unlike futures-based ETFs structured as grantor trusts that invest in no physical commodities and report gains using K-1 forms instead of 1099 forms.
Dividends
Gold ETFs do not distribute dividends; instead they earn profits on sales and redemption of units which are taxed as short-term capital gains similar to interest earned on bank fixed deposits.
Investors holding gold ETF holdings within tax-deferred accounts such as an IRA or 401(k) don’t pay taxes until they withdraw funds, at which point withdrawals will be taxed at their individual ordinary income tax rates.
Distributions by Passive Foreign Investment Corporations (PFICs): If you invest in ETFs that own shares in foreign companies, be aware that they could fall under the category of passive foreign investment corporations (PFICs). PFICs provide income at an unusually high tax rate of 28% instead of the regular long-term capital gains rate of 15%.
Prior to Budget 2024, long-term capital gains (LTCGs and STCGs) from gold ETFs sold within three years were taxed at applicable slab rates; however, thanks to amendments included in this year’s Budget this no longer occurs.
Short-Term Gains
Gold ETFs offer investors an alternative to purchasing physical metal, yet many investors may be surprised to learn how these commodity funds are taxed. Although investing in them follows similar procedures as investing in stocks or mutual funds, taxes must still be considered when making decisions about this form of investing.
ETFs that invest in futures contracts, for instance, must account for gains using a hybrid rate that takes into account both long-term (holding assets for more than one year) and short-term gains based on how long you’ve owned it – something which could increase tax liability when selling the investment depending on its holding period.
Once upon a time, if you sold sovereign gold bonds held for three or more years and made gains upon their sale, those gains would have been added to taxable income and taxed at applicable income tax slab rates. Under new rules however, holding periods have been reduced from three to 12 months; this might increase tax liability upon sale but this might also mitigate with indexation benefits lost through this move.
Long-Term Gains
As the popularity of gold investments continues to surge, investors may find themselves with unexpected tax bills. One way to lower this bill may be limiting exposure or opting for buy and sell transactions at later dates – according to experts.
ETFs that hold physical precious metals such as the SPDR Gold Shares (GLD) are structured as grantor trusts and, thus, profits generated from these gold ETFs are subject to tax at a rate of 28% capital gains tax for collectibles. Conversely, ETFs not investing directly in one specific precious metal or not structured as trust are exempt from this top rate of taxation.
Investment professionals strongly suggest consulting both an investment and tax professional prior to investing in precious-metal ETFs or any other commodities, including gold ETFs. An investment professional can assist investors with understanding the market and making informed decisions while a tax specialist will make sure investors are adequately prepared for any unexpected tax liabilities associated with commodity-based investments such as those offered by gold ETFs.
