Are you considering investing in gold or other precious metals?
In this article, you’ll learn that a basic understanding of related tax issues will reveal the most cost-effective ways of buying and owning gold and silver.
But first let’s consider what drives people to invest in precious metals.
Table of Contents
Why Do People Invest in Precious Metals?
For centuries, investors have viewed gold and silver as a refuge against economic crises.
One reason for this view is the tendency of gold to move in an inverse relation to a country’s currency.
For example, as the US dollar goes down, gold often (but not always) goes up. So precious metals are traditionally viewed as “insurance” to mitigate against losses in stocks and bonds.
This relationship between gold and the dollar attracted renewed attention in the wake of the coronavirus pandemic, when the U.S. government began “printing” trillions in stimulus.
This tactic of issuing stimulus funds is commonly viewed as devaluing existing currency and savings. These central bank policies are among the factors that drive the price of gold.
While the view of gold as a “safe haven” is contested, after the coronavirus pandemic began in 2020, both gold and silver outperformed nearly all major commodities.
Another reason for interest in precious metals comes from major analysts who believe we’ve entered a bullish “super cycle” for commodities in general, and metals specifically.
While the term precious metals typically also includes palladium and platinum, this article will focus on gold and silver, due to their popularity.
How your investment (or sale of your investment) will be taxed depends on your country of residence.
However, we can provide a few observations, using US investors as an example. We highly recommend that you consult a tax professional before investing.
How Does the IRS Tax Gold and Silver?
One key issue is whether you sell your precious metals holdings before or after owning them for one year.
Short-Term Capital Gains
When US investors sell their gold or silver holdings before the one year mark, any profit generated will be treated as a short-term capital gain.
That means it will be taxed as ordinary income. (Be aware that your profits can potentially bump you into a higher tax bracket.)
Long-Term Capital Gains
When US investors sell their gold holdings after the one year mark, they will be subject to one of two tax rates:
- The “collectibles” tax on net gain.The maximum rate is 28%. Many gold or silver ETFs that are fully backed by bullion, and structured as “grantor trusts,” fall into this category. In these cases even if you do not own the underlying metals, and only profit from price movements, you will still be taxed as though you do own the metal. Coins and bars are also treated as “collectibles.”
- The long-term capital gains tax on net gain.Rates are 0%, 15%, or 20%, depending on what tax bracket and filing status you fall under. Most U.S. citizens would pay the 15% rate, according to IRS data. Precious metals mining stocks, mutual funds, and mining ETFs fall under this tax category.
Investing in Foreign CEFs
Foreign CEFs (closed-end funds) backed 100% by bullion typically fall under the long-term capital gains tax category.
This would make CEFs the most cost-effective way of owning precious metals. CEFs also provide the convenience of purchasing precious metals by buying shares via a stock brokerage account.
The largest gold CEF is Canadian: the Sprott Physical Gold Trust (NYSE:PHYS). Sprott also offers the Sprott Physical Silver Trust (NYSE:PSLV), the Sprott Physical Gold and Silver Trust (NYSE:CEF), and the Sprott Physical Platinum and Palladium Trust (NYSE:SPPP).
The Sprott physical metal trusts are classified as Passive Foreign Investment Corporations (PFICs) which allows US non-corporate investors to be taxed at long-term capital gains rates.
This requires that the taxpayer:
- Fill out IRS form 8621
- Under section 1295 of the form, make a Qualified Electing Fund (QEF) election.
(Sprott provides taxpayers with the required information to make a QEF.)
CEFs Versus Coins and Bars
We’ve seen that the Sprott physical trusts are among the most cost-effective ways to own precious metals.
Small gold coins and bars, by contrast, are the costliest way to buy (and own) gold or silver. There are many retailers offering these products for home delivery.
Since the pandemic began, the premiums (mark-ups) on these coins have risen substantially. In some cases, one-ounce silver coins have been sold with 30% or higher markups above the spot price.
(The “spot price” of gold or silver is the current price of one Troy ounce of the metal.) Typically, the larger the size of the bar, the smaller the premium.
Dealers also sometimes offer volume discounts and discounts based on method of payment.
Services like BullionVault.com and GoldMoney.com provide cost-effective online purchasing of metals, which are stored in an audited vault for you.
(GoldMoney.com has instituted a $10 minimum monthly fee.) Remember that physical metals held in storage by a service like this will be taxed as “collectibles.”
It’s also worth noting that when you buy shares of Sprott physical metal trusts, you own the underlying metal.
It’s also possible to “redeem” it (have it delivered to you) but you must meet their requirements to do so.
The investor interested in precious metals has a number of vehicles to choose from: stocks in mining companies and mining interests; mutual funds; various ETFs, and physical coins and bars.
But the Sprott physical metal trusts are unique in that they are taxed under the long-term capital gains rates.
Understanding how precious metals are taxed, and premiums associated with small bars and coins, should help you make wise investing decisions.
Remember, when you file your taxes with TurboTax you get your specific questions answered. Using TurboTax’s free W2 finder also simplifies the tax filing process by reducing the amount of time needed to gather all necessary documents.