Tax Smart Ways to Invest in Gold: 4 Things to Know

As one of the most effective diversifiers, gold is a popular investment of choice for many. This precious metal tends to hold its value even in volatile markets. It also serves as an ideal hedge against inflation, and protects against the effects of deflation. Today, the price of gold per ounce is seven times as much as it was in 1970 (adjusted for inflation). This is one of the many reasons people have recently decided to invest in gold.

However, it’s important to know that the Internal Revenue Service (IRS) considers gold a capital asset subject to capital gains tax. The rate depends on the investor’s marginal tax rate, but it can’t go any higher than 28%. 

Taxes can, indeed, cut deep into an investor’s money if they decide to sell gold or any gold-related asset. But, there are ways to mitigate the effects of taxation on such investments.

Gold Individual Retirement Account (Gold IRA)

While individual retirement accounts (IRAs) have been around since 1974, it wasn’t until 12 years later that the IRS began allowing gold investments in them. Then, 12 more years later, it allowed gold bullion with a 99.5% purity. These revisions gave rise to what would become known as a Gold IRA.

Gold IRAs aren’t subject to the 28% capital gains tax rate, unlike a standard gold investment. The IRS treats them similarly to ordinary income, taxing investors depending on their annual gross income in the tax bracket. For example, if the cash out falls within the 15% income bracket, the investor will pay 15% tax.

Gold IRAs are suitable for people whose annual income falls below the 24% bracket. Still, it pays to keep the following Gold IRA tax rules in mind:

• As with a standard IRA, Gold IRAs carry a 10% early withdrawal penalty for anyone wanting to cash out before reaching 60 years of age.
• Consequently, anyone with an income beyond the 24% bracket will pay a higher tax rate than the 28% maximum tax rate.
• Losses incurred by such an investment aren’t deductible.
• As per a 2007 IRS ruling, Gold IRA holders can’t physically possess gold.

Gold Bouillon and Coins

Given the restrictions of opening and maintaining a gold IRA, some investors choose to go with the standard gold investment. Bullion and coins are classified as collectibles under the tax code, meaning people can buy and own them. They can store these items at home (preferably inside a disaster-proof safe), in a bank’s deposit box, or via a service that offers secure storage.

Investors that get taxed over the 28% capital gains tax rate in terms of income can reduce their taxes by holding onto their gold collectibles for over a year. Even if one has a gross income that entails the highest possible tax rate, their gains will only be taxed the 28% maximum if they sell their gold after a year. 

Naturally, those whose gross income is below the 28% ceiling have the advantage of selling their gold anytime they choose. Whether selling it before or after a year, their gains will still be subject to taxes at their corresponding bracket.

Gold ETFs

Gold exchange-traded funds (ETFs) act similarly to stocks; investors don’t physically own gold, but have a stake in gold-related assets. When buying and owning actual gold isn’t possible for some reason, ETFs allow people to invest in gold in smaller but more controlled portions.

As of this writing, the market recognizes a total of 20 gold ETFs available for trading in the U.S. Most experts say investors should be concerned with one or two for maximum return on investment: SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). These two ETFs account for almost 90% of all total gold-related assets being traded in the country.

Gold ETFs are subject to the same tax rules as physical gold, but with several advantages. First, they have high liquidity, meaning they can be traded in the market at any time, with the returns close to the spot price of bullions after expenses. Second, because they tend to realize far fewer capital gains than mutual funds, ETFs are tax-efficient.

Gold Mining Shares

Investors can opt to buy shares of a gold mining company, especially if gold prices have steadily risen recently. In such cases, gold mining shares can generate far greater returns than any of the options explained so far.

What makes this even more lucrative is its tax treatment. When held for more than one year, gold mining shares are subject to the maximum capital gains tax rate, similar to physical gold and ETFs. Even if the share price increases with the price of gold per ounce, the maximum tax rate will remain.

However, there’s as much risk investing in these shares as benefits. To put it simply, if gold prices tumble, so do investors’ returns. Poor management and production problems on the mining firm’s part can also reduce profits.

What to Know to Invest in Gold – Summary

By no means does this list outline all the ways to save taxes on gold investments. Given how much gold can sell, physical or otherwise, it pays to learn more about the best possible options by consulting an expert.

For more articles like this one detailing how to invest in gold, be sure to visit our tax policy and investing sections of the site.