As with any financial investment, the IRS taxes your profits when selling assets for more than you paid for them – but careful planning can minimize your tax bill and lower it significantly.
Staying informed and compliant with federal laws is of utmost importance, including keeping detailed records and consulting professional advisors for advice.
Capital Gains Tax
As with any investment, physical gold investments are subject to Capital Gains Tax (CGT). Because physical precious metals are considered collectibles by the IRS, the maximum long-term capital gains rate can reach 28%, far exceeding the typical 15% long-term capital gains tax rate for most taxpayers. To avoid incurring this additional cost when investing in gold, investors can choose funds or assets which don’t purchase physical bullion directly.
Understanding CGT guidelines and making smart investments that reduce taxes are the keys to successful investing. This means investing for long-term gains to take advantage of lower long-term capital gains tax rates; and keeping records to accurately calculate profit and report it correctly.
At times it may also be beneficial to offset gains with losses from other investments, in order to lower taxable income and CGT liabilities. This strategy works effectively provided your gains do not surpass your annual tax-free allowance.
1099-B Reporting Requirements
Precious metal dealers must submit IRS Form 1099-B when selling certain precious metal items to avoid potential instances of tax evasion and to monitor profits made by non-corporate sellers. This allows the IRS to keep tabs on profits generated from these sales and detect instances of potential tax evasion by non-corporate sellers.
The 1099-B form also details any federal income taxes withheld from your investment, so that you can ascertain how much capital gains tax may be due when selling gold and silver investments.
Though some online sources claim that physical gold bullion sales are exempt from capital gains taxes, this is only partially true. The IRS classifies physical bullion as collectibles and therefore you are liable to long-term capital gains taxes when selling. Short-term capital gains from holdings sold within one year are subject to ordinary income rates of 37 percent or even more depending on when they were sold.
Exemptions
Gold and silver coins have long been recognized as tangible stores of wealth, offering protection from inflation, currency fluctuations and economic instability. When selling precious metals at a profit however, these transactions may be subject to capital gains taxes; how much you owe depends on how long they were held onto.
The Internal Revenue Service currently classifies physical gold and silver as collectibles, subjecting them to a maximum 28% long-term capital gains tax rate. Sound money activists have advocated for changes to this policy, contending that taxing exchange of dollars for gold and silver goes against constitutional principles.
Investors can also purchase gold indirectly via mutual funds and ETFs, which have significantly lower costs due to economies of scale in insurance, storage and other services. In general, these vehicles tend to attract less scrutiny from the IRS and may qualify for lower long-term capital gains rates between 0%-20% depending on income levels.
Tax Planning
The tax implications of owning gold can differ widely depending on how it’s invested. Physical gold such as bullion and coins is classified by the IRS as collectibles and profit from sales can be subject to up to 28% capital gains tax compared with 15% for most assets and taxpayers. Meanwhile, financial products like exchange-traded funds or mining company stock fall under capital asset category which typically have lower taxes on long-term profits.
As such, it’s vital that you maintain accurate records of purchases and sales transactions, calculate your cost basis accurately, report all relevant transactions correctly when selling collectibles, as well as using strategies to reduce your tax bill such as strategic selling or offsetting profits with losses carried forward from other investments. By pairing these strategies with the appropriate investment vehicle you can ensure that your gold investments align with your overall financial goals and provide maximum after-tax returns.
