Precious metals such as gold can be excellent investment vehicles when used well. After all, physical gold is known to be able to retain its value extremely well when compared to other assets that have a direct relationship with Fiat currencies, which means that they become a lot less viable when challenges such as inflation begin to creep in.
Before you invest, however, you must be aware of how exactly taxation works. That's why we're here today. To avoid any unwanted surprises, here is a comprehensive look at exactly how gold is taxed.
There's No Capital Gains Tax on Short Term Capital Gains
Whatever tax you pay on your gold holdings will depend heavily on how long you held on to them in the first place. Capital gains tax will be one of your biggest concerns, if not the largest one. Note that these will only apply to investments that you've held on to for at least a year.
Anything below that does not fall under the long-term capital gains umbrella, which means that the taxation will occur as ordinary income.
Note that taxation, as is the case with other areas, will vary based on your tax bracket and whether you will be filing alone or jointly with a spouse.
Understanding your tax bracket and how it could mean significant savings is also essential. This will guide you on how long you should realistically be holding on to your gold investments.
Your Investment Type Is a Big Factor
Bear in mind that there is no one way to invest in gold. Apart from the period, the amount you pay in taxes will also be determined by which investment type applies to you.
Capital gains taxes will either stand at 0%, 15%, or 20% based on where your income bracket lies. According to the Internal Revenue Service (IRS), All or some of your net capital gains tax may be at 0% depending on where your income stands as an individual or jointly. You can check what the actual income figure is annually as it is subject to change.
While gold bullion or gold coins are investments, the IRS will define them as collectibles. The tax rate for this kind of gold investment stands at a maximum of 28%, which is not only applied to buying gold directly. If you are to invest in gold exchange-traded funds that use the physical precious metal as the underlying asset, the rate applies too.
Remember, however, that some ETFs and gold stocks are backed by investments in mining companies, and these kinds of ETFs would allow you to avoid the higher tax rate.
Gold futures are also an option since they have a preferred tax rate. 60% will fall under the long-term capital gains umbrella, with the other 40% being on the short-term side of the fence.
Different rules will apply to mutual funds and other investment types too so before you decide which way to go, you may want to talk to an investment advisor.
How the IRS Looks at Gold Taxation
Remember that the collectible status of gold bullion coins and other such physical holdings doesn't just apply if you were to buy gold from a dealer. They work the same way that antiques and art do, which means that any active trading or receiving gold as a gift has tax implications you may have to deal with on your profits.
So if you're thinking about capitalizing on selling gold at a desirable rate, remember you may be subject to this. Additionally, any gains from gold coins or bars must be reported to the IRS. The taxable gain will then be calculated by looking at the total sales price and deducting your cost basis from it, which is the combination of what you paid for the item and its storage cost.
Is There a Way to Avoid Tax Implications on Gold?
We get this question all the time and the answer is no. There are gold dealers out there who will tell you that there are tips and tricks they can give you to help with avoiding dealing with the taxation side of things, but this is simply not true. If you see this kind of advertising anywhere, we would advise you to run as far as you can.
Be that as it may, all hope isn't lost as you can make decisions that lead to more favorable tax treatment. Tax planning is essential for this.
How Gold Investors Minimize Their Capital Gains Tax Requirements
As we've taught you by now, once you make a profit as a gold investor, there will be a capital gains tax to contend with. You need to keep track of what the implications are considering that these are investment-based expenses. This is especially true since the 28% collectibles tax rate, for example, is higher than that of profits from other investment types.
If you want to try to get closer to one of the lower income bracket-based rates, then you may want to switch your focus to alternative gold investment options such as ETFs that are not purchasing physical gold.
Note that even if you do decide to hold on to your gold for over a year, you can ensure that you don't pay taxes on your profits until sales that equal more than the purchase price take place. Additionally, the IRS will allow investors to deduct losses when gold holdings are sold below the original cost bases.
A good strategy is to spread out your purchases based on how long you want to hold the gold before you look to sell.
Final Remarks
As a gold investor, you need to remain acutely aware of what kinds of implications come with different investment types where taxation is concerned, especially considering that you're likely investing for financially viable reasons.
If you're trying to pay the lowest taxes possible, for example, then we'd advise you to choose an investment methodology that doesn't involve any physical exposure to gold and silver.
In any case, it's likely a good idea to get external advice from a tax planner to optimize your approach.
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.
