Have you considered reducing your gold consumption? It’s important to remember that this is not an investment. Gold (and other precious metals) are classified by the IRS as collectibles rather than investments. If held for less than a year, gains from collections and investments are taxed as regular income. When the two are kept for more than a year, the tax treatment is quite different. Gains on investments are taxed at a maximum rate of 20%, while gains on collectibles are taxed at a rate of 28%. That’s more than a half-dozen times the tax!
The same requirement applies to physical gold-backed Exchange Traded Funds (ETFs). The gain on your gold ETF could be taxed as a collectable gain. The tax treatment of the ETF will be determined by how much of the fund is invested in physical gold versus a gold-linked asset. Even if an ETF owns only a small percentage of the physical commodity, it may qualify for investment tax treatment.
Even if you decide not to sell your gold ETF, the collectibles tax can still hit you. To cover operating expenditures, the ETF may need to sell part of its assets. Even if the shareholders do not get a cash distribution, any gains realized on the sale will be passed on to them. This is known as phantom income. To the IRS, paying tax on income you didn’t get makes perfect sense. Fortunately, none of this applies to precious metals mutual fund investors. This sort of fund’s capital gains and payouts are handled the same as any other mutual fund.
When assessing your precious metals holdings as part of your year-end investment evaluation, keep this information in mind. Nobody enjoys unpleasant surprises. Particularly when the unexpected arrives in the shape of income taxes.
What is the taxation of gold ETFs?
Gold, silver, aluminum, copper, heating oil, light crude, natural gas, RBOB gasoline, corn, soybeans, sugar, wheat, and zinc are among the more than 125 exchange-traded funds (ETFs) that invest in or hold commodities. To achieve their commodity positions, several commodity ETFs own futures contracts, while others possess the real commodity. Commodity ETFs are subject to special tax rules: The tax consequences for investors are influenced by the legal structure of commodity ETFs and the kind of ETF—futures contracts or actual commodities.
Holding commodity ETFs
Even if you do not sell your shares, you may face annual income tax concerns depending on how the ETF is constructed. Investors in a commodity ETF that is constituted like a partnership and owns commodity futures contracts face specific tax rules. Investors are required to report the ETF’s capital gains at a hybrid rate of 60% long-term and 40% short-term gains each year. This is true regardless of the ETF’s actual distributions. ETFs may potentially generate interest income for investors. The capital gains allocated to investors by futures-contracts ETFs are reported on a Schedule K-1 rather than a Form 1099 each year.
Commodity exchange-traded funds should not be confused with commodity exchange-traded notes (ETNs). These, too, can keep track of price movements in commodities. However, they are not subject to the 60/40 ratio when it comes to taxes. During the year, there are usually no dividends or interest payments. Rather, when ETN shares are sold, investors are taxed.
ETFs that hold physical commodities do not transfer earnings to investors, hence there is no annual tax cost for them. From a legal sense, these ETFs could resemble grantor trusts. The tax repercussions for investors arise only when they sell their ETF holdings.
IRAs are subject to a special rule. While collectibles are normally prohibited in IRAs, some US gold, silver, and platinum coins, as well as gold, silver, platinum, and palladium bullion, are allowed. IRA owners who desire to invest in precious metals can do so by investing in grantor investment trusts, which are classed as a type of IRA. IRA owners will be recognized as receiving a taxable dividend only if shares in ETFs holding the commodities are issued to them, according to a private IRS ruling. If you’re still unsure whether or not you can hold an ETF in your IRA, read the tax part of the fund’s prospectus, which is usually available online.
Selling commodity ETF holdings
When you sell shares in an ETF for a profit after holding them for more than a year, the capital gains tax rates are typically 0%, 15%, or 20%, depending on your taxable income and filing status. Commodity ETFs, on the other hand, may be regarded differently, depending on the type of ETF involved.
- Investors who sold futures-contracts ETF shares have already reported their profits, which were transferred on to investors and collected annually. When the shares are sold, there is usually no extra gain or loss to declare.
- For individuals in tax brackets at or above 28 percent, investors selling shares in commodity ETFs that hold physical gold or silver may be subject to a long-term capital gains rate of 28 percent. If these ETFs are grantor trusts, however, when investors sell their shares, they receive regular income rather than capital gain.
- The regular capital gain and loss regulations apply to investors who sell shares in commodity ETNs. Gains on the sale of currency ETNs, on the other hand, are taxed at regular income rates.
Note that, in addition to income tax, there may be a 3.8 percent Medicare surcharge. It applies to high-income investors’ net investment income. Commodity ETFs held in IRAs are exempt from this rule.
Final Word
Commodity ETF taxes is extremely tricky. As an investor, you can rely on the ETF issuer’s annual information return (e.g., a Schedule K-1 or a Form 1099) to outline your tax reporting responsibilities for the year. However, because your personal tax situation may have an impact on this tax reporting, it is critical to engage with a skilled tax professional to ensure that everything is done correctly!
What is the best way to avoid paying capital gains tax on gold?
Make use of a 1031 Exchange. To begin, a 1031 exchange can be used to postpone your tax due. This means you reinvest the proceeds from your gold sale by purchasing more gold, and provided you meet IRS standards, none of these transactions will be taxed.
How are gold gains taxed?
The price of gold has risen more than 17% so far in 2019 (as of 9/26/19), holding firmly near $1,500 an ounce. We believe we are in the early stages of a new gold bull market. We believe, along with other precious metals strategists, that the yellow metal will surpass its all-time high of $1,900 in the next few years as investors face the realities of lower global interest rates for the foreseeable future, rising global debt, trade tensions, and mounting geopolitical uncertainty.
When actual gold — and other precious metals such as silver, platinum, and palladium — are sold, many U.S. investors are confronted with a grim surprise when it comes time to pay taxes on the profits. The cause is as follows: Gold and other precious metals are classified as “collectibles” by the Internal Revenue Service (IRS), and are subject to a 28 percent long-term capital gains tax. Gains on most other assets held for more than a year are subject to the long-term capital gains rates of 15% or 20%.
Collectibles are Taxed at 28%
This is true not only for gold coins and bars, but also for the majority of ETFs (exchange-traded funds), which are taxed at a rate of 28%. Many investors, including financial advisors, face difficulties when it comes to owning these assets. They wrongly assume that because the gold ETF trades like a stock, it will be taxed as a stock, with a long-term capital gains rate of 15% or 20%.
The high expenses of owning gold are sometimes seen by investors as dealer markups and storage fees for physical gold, or management fees and trading costs for gold ETFs. Taxes can be a large part of the cost of owning gold and other precious metals.
Fortunately, there is a simple approach to reduce the tax implications of gold and other precious metals ownership.
PFICs are Taxed at 15% or 20% — A Tax-Friendly Way to Own Gold
Sprott Physical Bullion Trusts may provide better tax treatment for individual investors in the United States than comparable ETFs. Non-corporate investors in the United States are eligible for ordinary long-term capital gains rates on the sale or redemption of their units because the trusts are domiciled in Canada and classified as Passive Foreign Investment Companies (PFIC). For units owned for more than a year at the time of sale, these rates are 15 percent or 20 percent, depending on income.
To be eligible, investors — or their financial advisors — must complete IRS Form 8621 and file it with their U.S. income tax return to make a Qualifying Electing Fund (QEF) election for each trust.
While no one like filling out more tax papers, the tax benefits of holding gold through one of the Sprott Physical Bullion Trusts and making the annual election can be substantial.
Are ETFs subject to different taxation?
Equity ETFs, which can include anywhere from 25 to over 7,000 different equities, are responsible for ETFs’ reputation for tax efficiency. In this way, equities ETFs are comparable to mutual funds, but they are generally more tax-efficient because they do not distribute a lot of capital gains.
This is due in part to the fact that most ETFs are managed passively by fund managers in relation to the performance of an index, whereas mutual funds are generally handled actively. When establishing or redeeming ETF shares, ETF managers have the option of decreasing capital gains.
Remember that ETFs that invest in dividend-paying companies will eventually release those dividends to shareholders—typically once a year, though dividend-focused ETFs may do so more regularly. ETFs that hold interest-paying bonds will release that interest to owners on a monthly basis in many situations. Dividends and interest payments from ETFs are taxed by the IRS in the same way as income from the underlying stocks or bonds, and the income is reflected on your 1099 statement.
Profits on ETFs sold at a profit are taxed in the same way as the underlying equities or bonds. You’ll owe an additional 3.8 percent Net Investment Income Tax if your overall modified adjusted gross income exceeds a certain threshold ($200,000 for single filers, $125,000 for married filing separately, $200,000 for head of household, and $250,000 for married filing jointly or a qualifying widow(er) with a dependent child) (NIIT). The NIIT is included in our discussion of maximum rates.
Equity and bond ETFs held for more than a year are taxed at long-term capital gains rates, which can be as high as 23.8 percent. Ordinary income rates, which peak out at 40.8 percent, apply to equity and bond ETFs held for less than a year.
Can I invest in gold ETFs through my IRA?
Fortunately, the IRS has stated that IRAs can purchase shares in precious metal ETFs that are categorized as grantor investment trusts without issue. The IRS ruled in Private Letter Ruling (PLR) 200732026 that IRAs could purchase gold ETF shares.
Are gold coins exempt from taxes?
CGT (Capital Gains Tax) is a slightly more complicated tax than VAT. CGT is charged at the time of sale on goods and services where VAT is charged at the place of purchase. CGT is levied on any gains you make from the item’s sale. As a result, the amount of tax you pay is determined by the amount by which the gold product has increased in value since you bought it, rather than the price at which it was purchased or sold. In other words, this is the buying price less the sale price.
Capital Gains Tax has a smaller number of exemptions than VAT. There is no blanket exemption for investment gold options, and each instrument is handled individually.
CGT is not applied to a certain quantity of gold coins. Many of the coins produced by the Royal Mint are exempt since they are regarded legal tender in British currency. Because the Royal Mint produces all gold coins in the UK (non-legal tender coins are referred to as ’rounds’), practically all British gold coins are CGT-free.
The Gold Sovereign and the Gold Britannia are the most widely traded gold coins in the world, but the Royal Mint also produces a variety of other coins. In addition, both of these coins are VAT-free.
What are the current CGT rates?
At the time of writing (November 2017), the Capital Gains Tax legislation allows for a personal exemption amount on all profits up to £11,300. This exemption is based on the profit you make from the product, not the goods’s value. But keep in mind that this is your overall investing allowance, not your allowance per transaction.
As a result, CGT only applies to profits that exceed the personal exemption amount. If you make a profit of £20,000, you only have to pay Capital Gains Tax on £8,700.
- Individuals will receive 10% and 20% respectively (dependant on the total amount of taxable income).
It’s crucial to keep in mind that tax situations are frequently intricate, and these tax rates may vary depending on your specific scenario. Before making a purchase or sale that may be affected by these tax rates, you should properly research the government literature.
Where can I buy tax free gold?
If you want to buy tax-free gold, follow the guidelines offered here and hunt for products that are not subject to VAT or CGT. These are clearly marked on our website.
However, keep in mind that there are other variables to consider, such as locating a reputable merchant with transparent pricing that is closely related to the current gold price and low minimum premiums.
Which states have no sales tax on gold?
If you live in Alaska, Delaware, New Hampshire, Montana, or Oregon, you can buy gold and silver tax-free online through Bullion Exchanges. As of 2020, these states do not charge an internet sales tax.
What is the maximum amount of gold you may sell before paying taxes?
Keep in mind that the tax responsibilities imposed on precious metals are not immediate. Instead, you’ll report the profits you make from selling actual gold on Form 1040 Schedule-D on your tax return.
The IRS requires you to submit returns if you sell 25 ounces or more of gold, such as Maple Leaf Gold, Mexican Onza coins, or the gold Krugerrand.
If you sell gold bars weighing one kilogram or 100 ounces, you must also declare them to the tax authorities. However, you are not required to fill out or submit Form 1099-B for the sales of Gold Eagle Coins. Your tax bill arrives at the same time as your income tax bill.
Is it necessary for me to pay taxes on coins I sell?
Because coins are collectibles, even though the profits represent long-term capital gains, you are unlikely to qualify for a lower tax rate. Rather, the gains on the coins are taxed at the lowest of 28 percent or your marginal tax rate. If you’re in the 25% tax bracket, for example, your gains from selling the inherited coins will still be taxed at that rate. If you’re in the 33% tax bracket, though, your coins will only be taxed at a rate of 28%.
What is the maximum amount of gold a person can legally own?
This circular states the seizure limit but not the ceiling or maximum amount of gold that you can hold, which implies that your gold will not be confiscated to the degree that the limit is exceeded, although you may be requested to explain the source.
There is no maximum limit on the amount of gold jewelry or ornaments you can own if you got it from explained sources of income, such as inheritance. Your ITR, on the other hand, should correspond to the quantity of gold you own.
Furthermore, it is recommended that you maintain your purchase invoice. Keep a copy of the exchange invoice with the original purchase invoice in the event of a gold jewelry exchange.
A copy of the Will should be kept in case of inheritance. It serves as evidence of your inheritance. If the individual from whom you inherited the gold was a wealth tax payer, determining the amount of gold you inherited becomes easy.
Although the wealth tax was repealed, you still had to declare your assets if they exceeded Rs. 30 lakhs and file a return by March 31, 2015. If you have revealed the gold you own on your wealth tax return, your ownership will be validated, and you will be able to keep the gold.
What if you can’t explain the source of your gold?
According to the CBDT circular, a married woman can keep up to 500 grams of gold jewelry, an unmarried woman can keep up to 250 grams, and a male family member can keep up to 100 grams of gold decorations and jewelry.
It includes both inherited and purchased gold jewelry within the above-mentioned maximum. It will not be seized if you do not have supporting documentation for the above amount of gold jewelry. It does not, however, include gold coins and bars. Even if the gold coins and bars are under the above-mentioned limit, they can be taken.
If you have gold in excess of the above limit and can explain where it came from, the officer in charge may not seize it, depending on the specifics of the case.
This limit excludes any gold you may be holding on behalf of another person. So, if a raid occurs at your home and you are holding the gold of a relative or acquaintance, that gold will not be counted toward the stated limit and may be seized.
If your family consists of four members, one married female, one unmarried female, one married male, and one unmarried male, the total quantity of gold that will not be seized is $4,000.