Gold remains a popular hedge for sophisticated investors.
Strategy: Watch out for a unique tax whammy. Unlike most other investments, gold is subject to a special long-term capital gains rate that is 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 gain for sales of securities and other assets you’ve held longer than one year is 15%. If you’re in the ordinary top income tax bracket, however, the maximum tax rate is increased to 20%.
However, physical metals such as gold and silver—along with artwork, antiques, vintage wines and rare coins 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 rate of 28% for collectibles.
The form of physical metal doesn’t matter. Gains on gold coins, bars, gram gold accounts and gold certificates are all taxed at the 28% rate. Even exchange-traded funds (ETFs) owning physical metals are taxable as collectibles. Note: On the other hand, if you sell gold-mining stocks or shares of a mutual fund investing in gold, the gain is taxed under the regular rules for 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 professional for more details.
Tip: If handled properly, problems may be avoided by acquiring gold investments through a tax-deferred retirement account.
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