The Internal Revenue Service (IRS) classifies gold and other precious metals as collectibles that are taxed at a long-term capital gains rate of 28%. Gains on most other assets held for more than one year are subject to long-term capital gain rates of 15% or 20%. While many marketable financial securities, such as stocks, mutual funds, and ETFs, are subject to short-term or long-term capital gains tax rates, the sale of physical precious metals is taxed slightly differently. Physical holdings of gold or silver are subject to a capital gains tax equal to their marginal tax rate, up to a maximum of 28%.That means people in the 33%, 35% and 39.6% tax brackets only have to pay 28% for their physical sales of precious metals.
Short-term gains on precious metals are taxed at ordinary income rates. A key to successfully investing in gold is to minimize taxes on your profits. Gold is often taxed differently from other investments, and tax rules vary depending on which of the many different ways of investing in gold you choose. The IRS taxes capital gains on gold in the same way it does on any other investment asset. But if you have purchased physical gold, you probably 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 rate of long-term capital gains. And when possible, hold your gold investments for at least a year before selling them to avoid higher income tax rates. Digital gold is also taxed at the same rate as physical gold and depends on the duration of the investment held. The Long-Term Capital Gains (LTCG) applies to the sale of gold after three years at a rate of 20% plus tax and surcharge. However, returns of digital gold held for less than three years are not directly taxable.
That said, your investment in gold will attract taxes, and different forms of gold investments are taxed differently. Gold Exchange-Traded Bonds (ETNs) are debt securities in which the rate of return is linked to an underlying gold index. In other words, gold coins are taxable based on their total value rather than just weighing the amount of gold they are made of. Alternatively, a Physical Closed-End Fund (CEF) of gold is a direct investment in gold, but it has the benefit of taxes at rates of LTCG. Gold futures contracts are an agreement to buy or sell at a specific price, place and time a standard quality and quantity of gold. While physical gold contains jewelry, coins, bullion, digital gold can be purchased through mobile wallets.
For example, VanEck Merk Gold (OUNZ) holds gold bars and stores them in vaults, but allows investors to exchange their shares for bullion or bullion coins. The restriction aimed 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 rising in 1975. Digital gold is becoming increasingly popular among investors due to its many benefits, such as a very low initial investment, it can be purchased online without stress to store physical gold, etc. Gold Exchange-Traded Funds (ETFs) offer an alternative to buying gold bars and are traded like stocks. While secondary investments in gold, such as gold mining stocks, mutual funds, ETFs or ETNs may result in lower pre-tax returns, after-tax returns may be more attractive. The annualized return after tax of gold coins is the lowest, about a percentage point lower than that of the gold mutual fund which receives LTCG treatment.
Digital gold, physical gold, paper gold and derivatives contracts are some types of gold investments available at the present time. Whether through a brokerage account or through a traditional Roth or IRA account individuals can also invest in gold indirectly through a variety of funds, stocks of gold mining corporations and other vehicles including Exchange-Traded Funds (ETFs) and Exchange-Traded Bonds.
