As a hedge to the stock market volatility, some investors are turning to gold and other precious metals.
What are the tax consequences? When you sell gold, you must report the difference between the sales price and your basis as a capital gain or loss. If you’ve held the gold for more than a year, any gain is treated as a long-term gain.
Strategy: Absent special reasons, invest in gold inside your retirement plan. Compared to the usual 15% maximum federal income tax rate on long-term gains, the maximum federal income tax rate on long-term gains from precious metals is 28%—almost twice as much. By using retirement plan funds instead of personal funds for gold investments, you can dodge a tax disaster.
Balance out gold investments inside your retirement plan with traditional investments like stocks, bonds and cash-equivalents.
4 common ways to invest
Still bullish on gold? Here are four ways to invest:
1. Gold bars or bullion: This is the most conservative method. Gold bars can be purchased in quantities as small as one gram, although many investors prefer one-ounce gold bars. Be aware that other costs are connected with this type of investment such as broker commissions, insurance and storage fees. When you sell the bars, you may have to pay an assay charge for each bar.
2. Gold certificates: If you decide you want to buy gold on a regular basis, consider gold certificates. After an initial minimal investment of $250, you might make additional purchases of, say, $100 a month. Storage costs may run around 1% a year. But note that you don’t have to pay an assay charge when you sell gold certificates.
3. Gold coins: Several countries issue gold coins (e.g., the American Eagle and the Canadian Maple Leaf). In general, the cost is the spot market for gold plus a small commission and minting fees. Tax bonus: Gold coins that are minted by the U.S. government or one of the states, and some other gold coins of sufficient purity, can be held by IRAs. This is an exception to the general rule that prohibits IRA investments in coins and other collectibles.
4. Gold stocks and mutual funds: Gold mining stocks are traded on the stock market, so they’re subject to the same risks as other stock investments. However, mutual funds that invest in gold generally aren’t as volatile as individual stocks. You can purchase shares the same as with any other mutual fund through brokers or no-load funds. Key advantage: Mutual funds also offer diversification and professional.
If you own gold privately that you purchased at a higher price than the current market rate, you can sell the gold and claim a capital loss. The loss offsets other capital gains plus up to $3,000 of ordinary income.
Tip: You might swap precious metals in a like-kind exchange at year-end. There’s no current tax on the deal, but a tax loss is allowed for the difference. (The swap is actually a simultaneous sale and purchase.)