By Terry Hanlon
Federal tax season is here, and if you recently embarked on – or want to explore – one of the many types of gold investments, you need to know how the Internal Revenue Service treats them. Any gains from gold and physical-gold Exchange Traded Funds, or ETFs, outside an individual retirement account are taxed as collectibles, similar to art and antiques.
Gold bullion coins and bars are viewed as collectibles by the IRS even though their value for tax purposes is based on their metal content and not on rarity or design.
Gains from collectibles and investments are taxed as ordinary income if they're held for less than 12 months. Treatment by the IRS changes when either are kept longer, however. Gains on most investments maintained for over a year are taxed at a maximum rate of 20 percent but collectibles can be taxed at up to 28 percent. So, if your gold investment is more than a year old, any gain could be subject to a 28 percent tax. Additionally, a 3.8 percent net investment income tax may also apply.
Gold ETFs are usually physically backed or futures backed. Gains on gold ETFs can be taxed as collectibles, particularly if the investor held the gold himself. Treatment of an ETF by the IRS depends on how much of the fund is invested in physical gold and how much of it is in an asset tied to gold prices.
Gold Exchange Traded Notes or ETNs are debt instruments, with the rate of return tied to a gold index. ETNs are taxed for short- or long-term gains.
“When gold prices are rising, taxpayers typically receive a higher, after-tax return on gold held in an individual retirement account or IRA than in an ETF, brokerage account or storage,” said Terry Hanlon, president of Dillon Gage Metals in Dallas.
Since federal restrictions on gold ownership, imposed in 1933, were lifted in 1974, U.S. investment opportunities have grown. The Taxpayer Relief Act of 1997 broadened holdings allowed in IRAs to include one, one-half, one-quarter or one-tenth ounce U.S. gold coins and one-ounce silver coins minted by the U.S. Treasury Department, along with certain foreign coins.
Today IRAs can invest in IRS-permitted gold, silver, palladium and platinum bullion and coins. Gold is the favorite metal in IRAs. Investors hold gold and silver American Eagles and Silver Eagles in, along with Canadian Gold Maple Leaves, gold Austrian Philharmonics and gold Australian Kangaroos.
Funds can be rolled from a traditional IRA or 401(k) into a gold IRA. While after-tax returns on a gold IRA can be higher than on other investments in the metal, some restrictions apply. An IRA owner can’t have physical possession of his gold. But it can be held by a trustee. Trustees charge storage and administration fees, and an investor may have to pay a seller’s fee if he decides to cash out or liquidate.
Self-directed Roth IRAs can invest in coins and bullion that meet IRS requirements.
Dillon Gage Metals offers clients a range of products that meet IRA rules. With licensed storage facilities near New Castle, Del., and Toronto, Canada, Dillon Gage Metals’ subsidiary, International Depository Services, can assist IRA administrators and investors.
Dillon Gage also offers a streamlined precious metals retirement account option with its proprietary Closed Loop IRA platform – available in both the U.S. and Canada.
Taxpayers report any gains from selling gold on Form 1040, Schedule D. Any gains on gold held for up to a year are short term, while those on holdings for over a year are long term and subject to the 28 percent collectibles capital-gains tax rate. Losses from selling gold are reported on Schedule D and are used as a tax deduction subject to IRS limitations. ETFs provide taxpayers with 1099 forms to report their short-term or long-term gains or losses.
For further information, please visit the Internal Revenue Services’ online library of capital gains taxation information.