What are the tax consequences for investing in precious metals?
Holdings in precious metals such as gold, silver or platinum are considered to be capital assets, and therefore capital gains may apply.
The IRS classifies precious metals as collectibles, and therefore they may potentially be taxed at the maximum collectable capital gains rate of 28 percent. This does not necessarily mean that someone will have to pay 28 percent.
If you are in a federal tax bracket of 28% or greater, your net long-term gains from collectibles are taxed at 28%. If you are in a federal tax bracket lower than 28%, your net long term gains from collectibles are taxed at your regular rate. The “collectibles” designation includes most forms of investment grade gold and silver, including:
All denominations of precious metal bullion coins and numismatic coins, bars, wafers, etc.
Precious metal “rounds” and commemorative coins
Certificates such as those from the Perth Mint
Certain Exchange Traded Funds (ETFs). Precious metal ETFs are generally divided into three categories: physical-backed ETFs structured as grantor trusts, such as the popular GLD. These ETFs are generally taxed as collectibles.
Second are securities “tied to” precious metals such as mining stocks, mutual funds and mining ETFs and Exchange Traded Notes. These are generally taxed as securities.
Third are closed-end funds, which are also trusts which generally are treated as collectibles.
The actual rate that someone pays is determined by the amount of time the precious metals were held and the payer’s ordinary income tax rate.
The investor must also determine if the capital gain is short-term or long-term based on how long they held the precious metals.
The capital gain will be assessed on only when you sell the actual precious metal holdings. If you are still holding the metal, then no capital gain has been realized and no tax reporting is due. If the value of your holding is below your cost basis then you may have a capital loss. Selling the precious metals will allow you to offset the loss with any other capital gain you may have realized in the tax year.
What’s a good tax strategy for precious metals investing?
If you want to avoid the high tax rates for investing in physical precious metals (PM), you can choose to invest in PM via the futures market. According to section 1256 of the IRS code, futures have a blended tax rate. 60% of the gains are taxed at the long-term capital gain rate and 40% of the gain at the short-term capital gain rate. This blended tax rate could help taxpayers minimize their tax liability when it comes to investing in precious metals.
Another strategy is to simply buy precious metals via your IRA or 401K plan. When IRAs were first allowed in 1974, investments in collectibles were prohibited (Sec. 408(m)(1)).
The prohibition’s intent was to reduce speculative risk-taking in retirement savings accounts. An exception to this rule introduced in 1986 allowed U.S. gold and silver coin investments.
Beginning in 1998, the exception was expanded to include bullion that is 99.5% pure. In 2007, the IRS ruled that gold ETFs were not collectibles for IRA investment purposes (Letter Ruling 200732026).
The one restriction that remains is that the IRA owner cannot have physical possession of the gold. This restriction is overcome by using an intermediary meeting the requirements of a trustee under Sec. 401(a) to hold the physical gold for a fee.
Like all IRA investments, gains from gold sold within an IRA are not taxed until cash is distributed to the taxpayer, and distributions are taxed at the taxpayer’s marginal tax rate.
To illustrate the tax consequences of owning gold, let’s look at the following example. Laura (60), single, wealthy taxpayer and Lance (60), single, median income taxpayer.
Laura’s annual income is $400K; she wants to invest 10K and considers gold coins, gold mutual fund or gold futures ETF. She is also considering investing via brokerage account, Traditional IRA, Roth IRA. She plans to hold it for 10 years and projects her income tax bracket to be 28%.
Lance’s annual income is $60K, his projected marginal tax bracket in 10 years is 15%. He considers the same choices as Laura.
The tax calculations for Laura and Lance indicate that the after-tax returns of gold investments in a traditional IRA dramatically exceed those of gold investments in a brokerage account or a Roth IRA.
Laura’s rate of return per investment:
|Investment||Brokerage||Roth IRA||Traditional IRA|
|Gold Mutual Funds||4.66%||5.68%||7.94%|
|Gold Futures ETF||4.29%||5.68%||7.94%|
Lance’s rate of return per investment:
|Investment||Brokerage||Roth IRA||Traditional IRA|
|Gold Mutual Funds||6.88%||5.68%||8.94%|
|Gold Futures ETF||6.48%||6.88%||8.94%|
The 3.8% net investment income tax may apply to gains on gold from the brokerage account for taxpayers with higher MAGIs than in these examples. However, under Sec. 1411(c)(5), net investment income does not include distributions from a Roth or traditional IRA (or other specified qualified plans)—another reason for higher-income taxpayers to favor an IRA as a gold investment vehicle.
As always you should consult your tax advisor on what is right for you. Contact OTA Tax Pros for a complimentary consultation