The Internal Revenue Service (IRS) considers physical holdings of precious metals such as gold, silver, platinum, palladium and titanium to be capital assets specifically classified as collectibles. Holdings of these metals, regardless of their form, such as bullion coins, bullion coins, rare coins or bullion are subject to capital gains tax. Capital gains tax is only due after the sale of such shares and if the holdings were held for more than one year. As an investor, you should keep in mind that capital gains are taxed at a different rate, much lower, than income from labor.
This is called the 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 hold your gold, you will have to pay taxes at the ordinary capital gain rate or at a general rate of 28%. The classic investment in gold is in bullion.
But ingot (whether gold or other metal) is designated as an object of collection under the tax code, so it is not eligible for regular treatment of long-term capital gains. Ingots include both coins and bars. Long-term gains on bullion are taxed according to your 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 gains or losses to be long-term. In addition, collectibles, including ingots, cannot be owned by a traditional or Roth IRA. The purchase of a collector's item is a prohibited transaction and is treated as a distribution to the owner of the IRA. However, some forms of ingots and coins are exempt from treatment as collectibles.
Legal Tender Currencies in the U.S. UU. Any currency issued under the laws of any state is also exempt. Bars of a certain finesse are not collectible either.
To qualify for the exemption, bullion or coins must be in the physical possession of a bank or an approved non-bank trustee. ETF shares are investments in collectibles for the purpose of capital gains tax rules. They will be taxed the same as ingots, discussed above. But under IRA rules, ETF shares are not considered prohibited collectibles.
Instead, the investor is buying shares in a fund, because the shareholder does not have a legal claim on a share of the bullion held by the ETF and cannot force a distribution. But not all gold ETFs are taxed the same way. For example, VanEck Merk Gold (OUNZ) owns gold bars and stores them in vaults, but allows investors to exchange their shares for bullion or bullion coins. A fee applies for redemptions below a minimum level.
Instead of investing in bullion or futures, an investor can buy the shares of companies that mine and produce gold and perhaps other metals. Ingots are a collector's item according to the tax code. That means you are not eligible for regular treatment of long-term capital gains. In contrast, bullion gains that hold the longest in a year are taxed at a maximum tax rate of 28%.
Gains held in bullion for one year or less are taxed as revenue. The restriction was intended to reduce gold grabbing, which according to the monetary gold standard was believed to be stifling economic growth, and lasted more than 40 years before being lifted in 1975. If you die before selling and the gold is inherited by your heirs, your cost base will be the fair market value of gold on the date of your death. Profit margins on gold bars are usually lower than on country-specific gold coins, but both are collectibles for tax purposes. The typical approach to investing in gold futures contracts is by buying gold futures ETFs or ETNs.
This fund buys a series of gold futures contracts that should have essentially the same performance as a gold index that the fund is trying to track, although there are anomalies in futures markets that can cause deviations. Gold is often taxed differently than other investments, and tax rules vary depending on which of the many different ways of investing in gold you choose. You can trade gold futures yourself or own an ETF that conducts the trade, such as the PowerShares DB Gold Fund (DGL). Gold futures contracts are an agreement to buy or sell at a specific price, place and time a standard quantity and quality of gold.
The annualized after-tax return of gold coins is the lowest, about one percentage point lower than that of the gold mutual fund, which receives the LTCG treatment. Investors in gold are not going to have equal returns after taxes, and part of the reason is the different tax treatments of the ways of investing in gold. While secondary gold investments, such as gold mining stocks, mutual funds, ETFs, or ETNs, can produce lower pre-tax returns, post-tax returns may be more attractive. Gold exchange-traded bonds (ETNs) are debt securities where the rate of return is tied to an underlying gold index.
There are special rules about holding gold in an IRA or other retirement account, which I will discuss in a future post. Alternatively, a physical gold CEF is a direct investment in gold, but has the benefit of taxes on LTCG rates. . .
