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Are you a gold bug? Don’t be tarnished

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Have you acquired gold as an investment hedge the past few years?

Strategy: Watch out for a tax whammy. Gold is subject to a special long-term capital gains rate, significantly higher than the usual rate.

In fact, depending on your situation, a long-term capital gain resulting from the sale of gold could trigger a tax rate almost double the rate you’re paying on your other long-term gains.

Here’s the whole story: The usual maximum federal income tax rate on long-term gains from sales of securities and most other assets you’ve held longer than one year is 15%. If you’re a single filer with 2013 taxable income above $400,000 or $450,000 for a joint-filing married couple, the maximum federal rate increases to 20%. (For 2014, the thresholds for the 20% rate increase to $406,750 and $457,600, respectively.)

However, physical metals such as gold and silver—along with artwork, antiques, vintage wines and coins rare and stamps—are classified by the IRS as “collectibles.” If you hold a collectible for a year or less before selling it, the short-term capital gain is taxed at ordinary income rates. Conversely, if you sell a collectible held longer than a year, the gain is treated as a long-term capital gain subject to a “special” maximum federal rate of 28%. Say you’ll pay the 28% maximum rate on long-term gains from collectibles if your regular marginal rate is 33%, 35% or 39.6%.

The form of physical metal doesn’t matter. Long-term gains from gold coins, bars, gram gold accounts and gold certificates are all subject to the maximum 28% rate. Even exchange-traded funds (ETFs) owning physical metals are taxable as collectibles.

Note: If you sell gold mining stocks or shares of a mutual fund investing in gold, the gain is taxed under the regular rules for capital gains from the sale of securities.

In addition, other special rules govern the tax treatment of gold futures. A blended tax rate (60% long term; 40% short term) applies as if the futures were sold at the end of the tax year. See your tax pro for more details.

Tip: One easy way to avoid tax complications on sales of gold is to hold this precious metal in a tax-deferred retirement account.

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