Gold has reached record high prices this year, attracting significant investor interest. However, the Internal Revenue Service (IRS) classifies gold as a “collectible,” which means profits from selling it can face a much higher tax rate than profits from stocks and bonds. This special tax treatment can result in a tax rate as high as 28% on long-term gains.
Understanding these tax rules is crucial for anyone considering adding the precious metal to their portfolio. The method of investment, whether through physical bullion, exchange-traded funds (ETFs), or mining stocks, also significantly impacts the final tax bill.
Key Takeaways
- The IRS taxes long-term gains from physical gold and gold ETFs at a maximum rate of 28%, classifying them as collectibles.
- In contrast, long-term gains from stocks and bonds are taxed at a maximum rate of 20%.
- For investors in lower tax brackets, the tax rate on gold gains is their ordinary income tax rate, which can still be higher than the 15% or 0% capital gains rate for stocks.
- Investing in gold mining stocks is an alternative where profits are taxed at the lower standard capital gains rates, but this carries different risks.
- Strategic tax planning, such as using retirement accounts or timing sales, can help manage the higher tax burden associated with gold.
Gold's Special Status in the Tax Code
When investors sell an asset they have held for more than a year, the profit is typically considered a long-term capital gain. For most investments, like stocks and bonds, these gains are taxed at preferential rates of 0%, 15%, or 20%, depending on the investor's total income.
Gold, however, falls into a different category. The IRS considers physical gold bullion, as well as silver and platinum, to be a “collectible.” This group also includes items like art, antiques, gems, and stamps. This classification has significant tax consequences.
Collectible vs. Capital Asset
The maximum long-term capital gains tax rate for collectibles is 28%. This is substantially higher than the 20% maximum rate applied to traditional financial assets like stocks. An additional 3.8% Net Investment Income Tax may also apply to high earners for both asset types.
This higher rate can come as a surprise to many. “You will have some investors that might underappreciate the tax implications of gold relative to other investments they’ve had in their lives,” said Ryan Zabrowski, senior portfolio manager at Krilogy, a wealth-management firm.
For investors whose ordinary income tax rate is below 28%, the tax on collectible gains is simply their regular income tax rate. Mark Luscombe, a principal analyst at Wolters Kluwer Tax & Accounting, explained, “For taxpayers with ordinary income-tax rates below 28%, the collectible tax is their lower ordinary income-tax rate.”
Even so, this can result in a higher tax bill. For instance, an individual in the 22% federal income tax bracket would pay a 15% tax on long-term stock gains but would owe 22% on their gold profits. Andrew Whitehair, a director at Baker Tilly, noted this is a “notable difference.”
How Different Gold Investments Are Taxed
The tax treatment an investor receives depends heavily on the form of their gold investment. The primary methods include physical bullion, gold ETFs, and stocks of mining companies, each with distinct tax rules.
Physical Gold and Gold ETFs
Purchasing gold bars, coins, or bullion directly subjects an investor to the 28% maximum collectible tax rate upon selling. This method also involves additional costs for storage and insurance, which are generally not tax-deductible for individual investors following the 2017 tax law changes.
Many investors opt for exchange-traded funds (ETFs) that hold physical gold, such as the popular SPDR Gold Shares (GLD). While these ETFs offer convenience, they do not bypass the collectible tax rule. Because the fund's shares represent ownership in physical gold, any long-term gains from selling them are also taxed at the potential 28% rate.
A Surge in Popularity
The appeal of gold as a safe-haven asset remains strong. According to the World Gold Council, gold ETFs saw net inflows of over $57 billion globally this year, highlighting a massive movement of capital into the precious metal.
Gold Mining Stocks
An alternative way to gain exposure to the gold market is by purchasing shares in gold mining companies. From a tax perspective, this is often a more favorable approach. Gains from selling mining stocks are treated the same as gains from any other stock, subject to the lower long-term capital gains rates of 0%, 15%, or 20%.
“Investing in gold-mining stocks would not be a collectible and gains would be subject to regular capital-gains rates,” Luscombe stated. “However, the risk analysis for gold-mining stocks would be different than a direct investment in gold.”
It is important to remember that the performance of a mining company's stock is not perfectly tied to the price of gold. Company-specific issues, operational challenges, and geopolitical risks in mining locations can all affect stock prices independently of the commodity's value.
Additionally, many large mining companies are based outside the United States. This can create complexities with dividends, which may be subject to foreign taxes. While a U.S. foreign tax credit can often mitigate double taxation, investors should verify if dividends are considered “qualified” by the IRS to receive preferential tax rates.
Strategies to Manage Gold-Related Taxes
Despite the higher tax rates, investors can use several strategies to lessen the financial impact of their gold investments. These approaches involve careful planning around account types, timing of sales, and other financial decisions.
Using Retirement Accounts
One effective method is to hold gold investments within a retirement account. The IRS generally prohibits holding collectibles in an Individual Retirement Account (IRA), but it makes an exception for certain highly pure gold, silver, platinum, and palladium bullion and coins.
These investments must be held in a specialized “gold IRA” or “precious metals IRA.”
- Tax Deferral: Within a traditional IRA, the investment grows tax-deferred. You only pay taxes when you take distributions in retirement.
- Ordinary Income Rates: The major trade-off is that all withdrawals from a traditional IRA are taxed as ordinary income, regardless of the asset type. Depending on your retirement tax bracket, this rate could be higher or lower than the 28% collectible rate.
- High Fees: Gold IRAs often come with higher setup and maintenance fees than standard IRAs.
Holding gold ETFs or mining stocks in a standard IRA or 401(k) also provides tax-deferred growth and simplifies the tax situation upon withdrawal.
Timing and Tax-Loss Harvesting
For investments held in a standard brokerage account, timing is critical. “If the sale is going to push you into a higher marginal bracket, maybe think about timing that sale to subject it to the lowest marginal rate possible,” suggested Whitehair.
Investors can also use tax-loss harvesting. This involves selling other investments at a loss to generate capital losses, which can then be used to offset the capital gains from selling gold. This strategy can significantly reduce the overall tax liability in a given year.
Other Financial Planning Tactics
Other planning opportunities exist, particularly for retirees and the self-employed.
- Accelerating Deductions: In a year you plan to sell gold, you could increase deductions by making charitable contributions or paying for large medical expenses.
- Managing Income: Retirees might choose to draw more from a tax-free Roth IRA in a year they realize gold gains to keep their overall taxable income low.
- Charitable Giving: An investor could donate appreciated gold ETF shares directly to a charity or a donor-advised fund. This allows them to avoid paying capital gains tax on the profit and potentially claim a charitable deduction for the full market value of the shares.
Matthew McKay, a portfolio manager at Briaud Financial Advisors, noted that his firm often views precious metals as a “long-term hold,” accepting the tax implications as part of the investment strategy. “Given our long-term view, if we are right, the pain of paying the taxes will be greatly reduced... when compared to the gains we have seen and expect to see over the years,” he said.
