Funds that invest in precious metals such as gold and silver are treated as collectibles for the U.S. UU. For tax purposes, this means that the long-term capital gains of those funds will be taxed at a maximum rate of 28%, compared to a maximum rate of 20% for stocks. This is the case not only for gold coins and ingots, but also for most ETFs (exchange-traded funds), which are subject to taxes of 28%.
Many investors, including financial advisors, have trouble owning these investments. They assume, incorrectly, that since the gold ETF is traded like a stock, it will also be taxed as a stock, which is subject to a long-term capital gains rate of 15 or 20%. Investors often perceive the high costs of owning gold as profit margins and storage fees for physical gold, or management fees and trading costs of gold funds. In reality, taxes can represent a significant cost of owning gold and other precious metals.
Fortunately, there is a relatively easy way to minimize the tax implications of owning gold and other precious metals. Individual investors, Sprott Physical Bullion Trusts, can offer more favourable tax treatment than comparable ETFs. Because trusts are based in Canada and are classified as Passive Foreign Investment Companies (PFIC), U.S. Non-corporate investors are entitled to standard long-term capital gains rates for the sale or repayment of their shares.
Again, these rates are 15% or 20%, depending on revenue, for units held for more than a year at the time of sale. While no investor likes to fill out additional tax forms, the tax savings that come from owning gold through one of the Sprott Physical Bullion Trusts and running for annual elections can be worthwhile. To learn more about Sprott Physical Bullion Trusts, ask your financial advisor or Sprott representative for more information. Royal Bank Plaza, South Tower 200 Bay Street Suite 2600 Toronto, Ontario M5J 2J1 Canada.
The IRS taxes capital gains on gold in the same way it does on any other investment asset. However, if you have purchased physical gold, you are likely to 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 long-term capital gains rate. And when possible, keep your gold investments for at least one year before selling them to avoid higher tax rates.
For tax purposes, the shares of gold mining companies are treated the same as other stocks, not as collectibles. When they are owned by taxable accounts, they are entitled to the maximum regular rate of long-term capital gains if held for more than a year, not to the tax rate on collectible goods. Shorter holding periods translate into short-term capital gains. Losses are also deducted, just like capital losses on other stocks.
Long-term earnings on ingots are taxed at the ordinary income tax rate, up to a maximum rate of 28%. Short-term gains on gold bars, like other investments, are taxed as ordinary income. An asset must be held for more than one year for gains or losses to be long-term. Gold futures contracts are an agreement to buy or sell at a specific price, place and time, a standard quality and quantity of gold.
The profit margins of gold bars are usually lower than those of country-specific gold coins, but both are collectibles for tax purposes. The after-tax annualized return on gold coins is the lowest, approximately one percentage point lower than that of the gold investment fund, which receives the LTCG treatment. There are special rules about holding gold in an IRA or other retirement account, which I'll talk about in a future post. And since gold is an investment asset, when you sell your gold and make a profit, it's taxed as capital gains.
Whether through a brokerage account or through a Roth or traditional IRA, individuals can also invest in gold indirectly through a variety of funds, gold mining company stocks and other vehicles, including exchange-traded funds (ETFs) and publicly traded bonds. This fund buys several gold futures contracts that should have basically the same return as a gold index that the fund is trying to track, although there are anomalies in the futures markets that can cause deviations. The typical approach to investing in gold futures contracts is by buying gold futures (ETFs or ETNs). While secondary investments in gold, such as gold mining stocks, mutual funds, ETFs or TNCs, may generate lower returns before taxes, after-tax returns may be more attractive.
Gold is often taxed differently than other investments, and tax rules vary depending on which of the many different ways to invest in gold you choose. You can trade gold futures yourself or own an ETF that operates, such as the PowerShares DB Gold Fund (DGL). Gold exchange-traded bonds (ETN) are debt securities in which the rate of return is linked to an underlying gold index. Alternatively, a physical gold CEF is a direct investment in gold, but it has the benefit of taxes on LTCG rates.
For example, VanEck Merk Gold (OUNZ) owns gold ingots and stores them in vaults, but allows investors to exchange their shares for ingots or bullion coins. The restriction was intended to reduce gold hoarding, which according to the gold monetary standard was believed to be stifling economic growth, and lasted more than 40 years before being lifted in 1975. .)