Physical gold investments (such as coins and bullion) are considered collectibles for tax purposes, with gains taxed at the maximum collectibles rate of 28%.
Tax on precious metal investments can make it more challenging for investors to profit from rising precious metal prices; however, there are ways to mitigate or even avoid this tax altogether.
1. Hold Your Investments for a Year or More
Gold is a highly desirable investment choice, providing protection from inflation and other economic concerns. However, it’s essential to be aware of how any tax implications of owning precious metals could impede your overall portfolio strategy.
According to the IRS, physical gold and ETFs backed by physical bullion are classified as collectibles and subject to a maximum 28% capital gains rate – much higher than the 15% or 20% long-term capital gains rates that generally apply.
To minimize your tax liability, it’s advisable to hold onto gold investments for at least a year before selling them. Also be mindful of any exemptions provided by local laws as these could help lower taxable gains from selling your gold investments – for instance if it comes as a gift or inheritance, such as from someone close, this could increase their cost basis and hence lessen any taxable gains that result from selling.
2. Offset Your Gains with Capital Losses
Gold and silver investments may be subject to taxes ranging from 10-28%, depending on their amount of profit earned and whether these gains are short-term or long-term in nature. There are ways, however, to mitigate these taxes using capital losses and other tax-advantaged strategies.
Investors can offset gains from precious metal investments by selling other collectibles that have appreciated less, such as art or antiques. Furthermore, it’s essential that investors stay aware of possible exemptions available within their jurisdiction; many regions provide tax breaks for specific forms of gold investments.
Investment-grade precious metals can also be gifted or inherited without incurring capital gains taxes, as the cost basis can be “stepped up” upon inheritance to market value and thus reduce capital gains taxes that would otherwise apply. When gifting or inheriting precious metals it is crucial that investors adhere to IRS rules; otherwise they could face gift or estate taxes and incur gift or estate tax liabilities.
3. Avoid Wash Sales
Gold investors can avoid wash sales by not purchasing assets within 30 days after selling, to prevent the IRS from classifying their profits as short-term capital gains rather than long-term. This step is particularly vital if investing in ETFs or mutual funds that do not directly purchase physical bullion (like options and futures contracts ).
Gains on physical gold and silver investments held for less than one year are taxed as ordinary income; those held more than a year can be subject to collectible taxes at up to 28%. Investors in certain states may also have additional state taxes owing on these gains.
Always save receipts from your bullion dealers whenever you buy or sell, as this will enable you to determine your cost basis when calculating capital gains taxes. A higher cost basis means lower capital gains taxes when selling.
4. Wait for the Right Time
Although there may be ways to avoid paying capital gains tax on gold, investors should remember that taxes represent a real cost of ownership for precious metals investors. From dealer markups and storage fees for physical bullion investments to management fees and trading costs for equity trading accounts, CGT can make a considerable impactful reduction to profits.
Additionally, certain collectibles such as physical gold coins may be subject to higher rates of tax than other investments; it’s therefore wise to hold onto your gold investments for at least 12 months to take advantage of the 28% maximum collectibles tax rate.
If you’re seeking to reduce the tax burden associated with gold investments, Sprott Physical Bullion Trusts could be an ideal way to do just that. They feature special tax treatment equivalent to long-term capital gains rates (of 15%-20%) for US individual investors. In order to take advantage of this tax benefit, an annual election must be submitted using IRS Form 8621 by either yourself or your financial advisor.
