Gold has long been an appealing investment option for Carlsbad collectors and investors, but before making your purchase it’s essential that you understand its tax ramifications.
Investors can purchase gold bullion from dealers or exchange-traded funds (ETFs). But the IRS taxes these investments at higher rates than stocks held for more than one year.
Taxes on Capital Gains
Capital gains or losses, the profits you realize when selling investments, form part of your taxable income for each year they occur and can often be taxed at different rates depending on how long you’ve held onto the asset in question.
Short-term capital gains, defined as gains you have held for less than one year, are taxed in the same manner as ordinary income (ranging from 10%-37%), however they may also trigger the 3.8% net investment income tax (NIIT). For those whose modified adjusted gross income exceeds certain thresholds.
Capital losses can often help offset capital gains tax bills, though retirement accounts or IRAs cannot use losses against their gains. You are also limited to carrying forward no more than $3,000 of losses each year; long-term capital gains are taxed at a lower rate.
Taxes on Capital Losses
At first glance, it may be tempting to offset capital gains with large investment losses to reduce taxes, but it is crucial that you carefully consider their effect on your overall tax situation. According to IRS tax tables, long-term capital gains may be taxed at either 0%, 15% or 20% rates while short-term gains are subject to ordinary income rates.
Capital losses are defined as investments that sell for less than what was invested, yet you cannot claim them until they have been “realized.”
The IRS classifies investments into two categories depending on their duration: short-term and long term. If losses occur from short-term investments, first they’re applied against any short-term gains and then, if any remain, against long-term capital gains.
Capital losses may only be deducted up to $3,000 from your taxable income each year; any excess losses must be carried forward for use in future years.
Taxes on Investing in Gold
Gold investment can provide a steady source of income. But it is important to understand how taxes on gold investing impact your tax situation.
The IRS considers physical gold to be collectibles, taxing it at a maximum rate of 28%. Because of this tax rate, investors increasingly favor gold-backed exchange-traded funds (ETFs). These ETFs purchase large quantities of physical gold from mining operations and sell shares back to individual investors at the standard capital gains tax rate – currently 20%.
ETFs also feature lower costs and fees than physical gold or bullion coins, helping investors increase their after-tax returns significantly. Over time, annualized after-tax returns of gold mutual funds far outstrip those of physical bullion coins; this trend holds especially true for individuals with higher MAGIs.
Taxes on Investing in Silver
Investing in precious metals is an excellent way to hedge against market instability. But investors must be wary of how taxes may reduce returns significantly.
The Internal Revenue Service considers physical gold and silver collectibles, so any profits from their sale are subject to a higher capital gains tax rate of 28%; unlike investments like stocks which typically face a maximum tax rate of 20% for long-term capital gains.
State sales taxes may also apply when purchasing gold and silver bullion. Furthermore, the IRS mandates certain gold and silver transactions be reported on Schedule D of Form 1040 while brokers or barter exchanges must file form 1099-B to report such activities.
Prudent tax planning can help investors reduce their capital gains tax liability. Selling silver for less than its purchase price and offsetting gains with losses can lower an investor’s overall tax bill, while investing through certain tax-advantaged accounts like an IRA may even allow you to completely avoid or defer capital gains taxes altogether.