The Internal Revenue Service (IRS) classifies gold and other precious metals as collectibles that are taxed at a long-term capital gains rate of 28%. Earnings on most other assets held for more than a year are subject to long-term capital gains rates of 15 or 20%. The Internal Revenue Service (IRS) considers physical holds of precious metals such as gold, silver, platinum, palladium and titanium to be capital assets specifically classified as collectibles. Holdings of these metals, regardless of their shape, such as bullion coins, ingot ingots, rare coins or ingots, are subject to capital gains tax.
To take advantage of the lower tax rate, many investors choose to open a Gold IRA to invest in gold and other precious metals. Capital gains tax is only due after the sale of such shares and if the shares were held for more than one year. In general, you have to pay taxes when you sell gold if you make a profit. According to the IRS, precious metals such as gold and silver are considered capital assets and financial gains from their sale are considered taxable income. The ingot is a collector's item according to the tax code.
That means you're not eligible for regular long-term capital gains treatment. On the other hand, ingot earnings held for longer than one year are taxed at a maximum tax rate of 28%. Gains from ingots held for a year or less are taxed as ordinary income. Gold exchange-traded bonds (ETN) are debt securities in which the rate of return is linked to an underlying gold index.
Alternatively, a physical gold CEF is a direct investment in gold, but it has the benefit of taxes on LTCG rates. The typical approach to investing in gold futures contracts is by purchasing gold futures ETFs or ETNs. If you die before you sell and your heirs inherit the gold, your cost base will be the fair market value of the gold on the date of your death. The after-tax annualized return on gold coins is the lowest, approximately one percentage point lower than that of the gold investment fund, which receives the LTCG treatment.
This includes coins and ingots weighing 1 kilogram or 1000 troy ounces respectively, along with any gold or silver item containing more than 50% pure gold or silver. While secondary investments in gold, such as gold mining stocks, mutual funds, ETFs or ETNs, may generate lower returns before taxes, after-tax returns may be more attractive. The profit margins of gold bars are usually lower than those of country-specific gold coins, but both are collectibles for tax purposes. Investors in gold are not going to have the same returns after taxes, and part of the reason is the different tax treatments of the ways of investing in gold.
In other words, gold coins are taxed based on their total value, rather than just weighing the amount of gold they are made of. You can trade gold futures yourself or own an ETF that carries out the trades, such as the PowerShares DB Gold Fund (DGL). There are special rules about holding gold in an IRA or other retirement account, which I'll talk about in a future post. You only pay taxes when you sell your gold for cash, not when you buy more gold with that money.