Exchange-traded funds backed by precious metals such as gold and silver are treated as collectibles for tax purposes, according to accountants. That means they have a higher federal tax rate of 28% on long-term capital gains. While many marketable financial securities, such as stocks, mutual funds, and ETFs, are subject to short-term or long-term capital gains tax rates, the sale of physical precious metals is taxed slightly differently. Physical holdings of gold or silver are subject to a capital gains tax equal to their marginal tax rate, up to a maximum of 28%.
That means people in the 33%, 35% and 39.6% tax brackets only have to pay 28% for their physical sales of precious metals. Short-term gains on precious metals are taxed at ordinary income rates. The IRS taxes capital gains on gold in the same way it does on any other investment asset. But if you have purchased physical gold, you probably owe a higher tax rate of 28% as a collector's item.
Avoid investing in physical metal and you can minimize your capital gains taxes at the ordinary rate of long-term capital gains. And when possible, hold your gold investments for at least a year before selling them to avoid higher income tax rates. Long-term gains on bullion are taxed at their ordinary income tax rate, up to a maximum rate of 28%. Short-term gains in bullion, like other investments, are taxed as ordinary income.
An asset must be held for more than one year for any gain or loss to be long-term. Bullion is collectible under the tax code. That means you are not eligible for regular long-term capital gains treatment. In contrast, bullion earnings held for more than one year are taxed at a maximum tax rate of 28%.
Bullion earnings held for one year or less are taxed as ordinary income. The IRS classifies precious metals, including gold, as collectibles, such as art and antiques. This applies to coins and gold bars, although their value depends solely on the metal content and not on rarity or artistic merit. You pay taxes on selling gold only if you make a profit.
However, a long-term gain on collectibles is subject to a tax rate of 28 percent, rather than the 15 percent rate that applies to most. Holdings of precious metals such as gold, silver or platinum are considered capital assets and therefore capital gains can be applied. When it comes to tax purposes, the IRS classifies precious metals as collectibles and, therefore, they may be taxed at the maximum collectible capital gains rate of 28 percent. As an investor, you should keep in mind that capital gains are taxed at a different, much lower rate than earned income.
This is called a capital gains tax. And since gold is an investment asset, when you sell your gold and make a profit, it's taxed as capital gains. However, depending on how you retained your gold, you will have to pay taxes at the ordinary capital gain rate or at a general rate of 28%. Gold futures contracts are an agreement to buy or sell at a specific price, place and time, a standard quality and quantity of gold.
This means that when a gold ETF sells part of the gold it owns, you have a short- or long-term gain or loss. For example, VanEck Merk Gold (OUNZ) holds gold bars and stores them in vaults, but allows investors to exchange their shares for bullion or bullion coins. Gold exchange-traded funds (ETFs) offer an alternative to buying gold bars and trade like stocks. The annualized return after tax of gold coins is the lowest, about a percentage point lower than that of the gold mutual fund, which receives LTCG treatment.
While secondary investments in gold, such as gold mining stocks, mutual funds, ETFs, or ETNs, may result in lower pre-tax returns, after-tax returns may be more attractive. You can trade gold futures yourself or own an ETF you trade, such as PowerShares DB Gold Fund (DGL). Gold exchange-traded bonds (ETNs) are debt securities in which the rate of return is linked to an underlying gold index. This fund buys a series of gold futures contracts that should essentially perform the same as a gold index that the fund is trying to track, although there are anomalies in futures markets that can cause deviations.
The typical approach to investing in gold futures contracts is by buying gold futures ETFs or ETNs. Investors often perceive the high costs of owning gold as dealer margins and physical gold storage fees, or management fees and trading costs for gold funds. Gold is often taxed differently from other investments, and tax rules vary depending on which of the many different ways of investing in gold you choose. Profit margins on gold bars are usually lower than on country-specific gold coins, but both are collectible for tax purposes.
Alternatively, a physical gold CEF is a direct investment in gold, but it has the benefit of taxes at LTCG rates. Whether through a brokerage account or through a traditional Roth or IRA account, individuals can also invest in gold indirectly through a variety of funds, stocks of gold mining corporations, and other vehicles, including exchange-traded funds (ETFs) and exchange-traded bonds. . .