Investors can reduce their overall tax burden through careful tax planning; however, investors in physical precious metals such as gold bullion bars or coins must pay capital gains taxes to the IRS on any capital gains derived from selling such commodities.
The IRS categorizes such commodities as collectibles and taxes them at a maximum rate of 28%; this rate is higher than what would apply for investments like stocks held for over one year.
1. Invest in CGT-free gold
With changes to the capital gains tax allowance slated to take place between 2023-2024, investing in CGT-free gold has never been more essential. Only Royal Mint coins that qualify as legal tender in the UK are exempt from CGT; thus any profits from investing these items are tax-free.
Legal tender gold coins provide significant tax advantages over non-legal tender coins that can be subject to the 28% collectibles rate when sold, as the IRS taxes all profits earned when selling any asset that appreciates in value without your efforts or effort. Therefore, when investing in precious metals it is critical that effective overall tax planning be used – including using 1031 exchanges so proceeds can be moved from one investment directly into another without incurring capital gains tax liabilities.
2. Invest in CGT-free bonds
Investors looking for long-term gains should include CGT-free bonds in their investment strategy to help reduce tax liabilities and protect hard-earned gains.
CGT (Capital Gains Tax) applies when selling assets that have increased in value over time, such as financial investments or rental properties. Based on your profits, tax rates could range anywhere from 0%-28%.
Physical precious metals like gold bullion and silver bars are great investments, but they do not qualify for CGT exemption. Coins such as South African Krugerrands and American Eagles do not either; however, UK legal currency gold Britannias and Sovereigns from the Royal Mint are exempt.
3. Invest in CGT-free ETFs
CGT taxes can eat into profits when selling investments like gold bullion. This is particularly true with the impending reduction of annual CGT allowance.
Step one of determining your tax liability is calculating your cost basis – that is, what was paid initially for precious metals.
Precious metals are classified by the IRS as collectibles, making them subject to specific tax rules. Investors should speak with a financial advisor in order to maximize their investments and minimize capital gains taxes overall.
4. Invest in CGT-free mutual funds
Gold investments that qualify as CGT-free can help reduce your tax bill, particularly since significant cuts to CGT allowance will soon come into force. Efficient tax planning is vital to investing success, and consulting a financial advisor is vital for taking full advantage of any possible opportunities to lower taxes.
CGT taxes the difference between an asset’s initial purchase price and selling price; such as gold bullion or coins. Any profits generated by selling gold are added to one’s annual income and taxed accordingly, depending on their individual tax bracket.
However, the IRS does not view physical gold and silver as collectibles; therefore gains from their investments are considered ordinary income and any losses can be used against future capital gains.
5. Invest in CGT-free gold coins
Gold investors naturally aim to maximize their profits when investing, yet many factors – including capital gains tax – may hinder this pursuit.
CGT differs from VAT in that its application occurs upon selling the asset; thus enabling an individual to determine what portion of their proceeds are subject to tax based on the difference between selling price and cost basis.
Individuals investing in precious metals could face a tax of approximately 2 percent of their investment value each year, making this burdensome payment an additional strain on finances. Thankfully, there are ways to avoid paying this levy.
Coins are one of the best ways to invest in gold without incurring capital gains tax (CGT), with legal tender gold coins such as those issued by the Royal Mint such as Britannias and Sovereigns being exempt from CGT and offered at highly competitive premiums when compared with bars.