Over the past 12 years, as the U.S. stock market has soared
and plunged but eventually landed pretty much right back where it
started, investors have looked for alternatives to try to make
money. Those who've turned to
relatively safe assets
like bonds have done quite well, as interest rates have collapsed
to near-record lows and brought big capital gains to
But among safe havens, gold has stood head and shoulders above
bonds. With prices having more than quintupled over that time
gold has never been more popular
. But if you're not smart about how you own gold, you can end up
losing far more of those profits than you should to Uncle Sam in
the form of higher taxes.
Below, I'll talk about some tax-efficient ways to own gold and
other precious metals. But first, let's take a look at the
problem and why taxes on gold can be higher than you'd
Collectibles and you
When you buy something as an investment, whether it's a stock or
a gold coin, the eventual profit or loss that you earn when you
sell it is treated as a
capital gain or loss
for tax purposes. Typically, for investments you hold for a year
or less, the short-term capital gains rate that applies is the
same as your ordinary income tax rate. But if you own an
investments for longer than a year before you sell it, then you
qualify for special long-term capital gains rates.
Not all capital gains are treated the same, however. Most
stocks and bonds qualify for a 15% maximum capital gains tax rate
if you're in the 25% tax bracket or higher. For those in lower
tax brackets, you may not have to pay any capital gains tax at
all. That's a huge benefit that gives you big incentives to
invest for the long haul.
Gold bullion, however, doesn't qualify for those particular
low rates. The
IRS treats gold coins and bullion as
, for which the maximum capital gains rate is a much higher 28%.
What that means from a practical standpoint is that most
middle-income investors get no benefit from capital gains on
gold, while top-bracket taxpayers get a small break but not
nearly as much as they would on a regular stock.
Can ETFs save the day?
Exchange-traded funds have become a popular way to trade gold and
other precious metals. But many of them also suffer from the same
tax treatment. So like gold coin investors, owners of
iShares Silver Trust
) , and a host of other similar precious-metals ETFs end up
paying up to 28% on their gains.
But some exchange-traded products have tried to take advantage
of obscure rules to get back into the 15%-maximum capital-gains
Sprott Physical Gold Trust
) has structured itself as a passive foreign investment company
and claims that if a taxpayer files what's called a Qualified
Electing Fund election, the 15% maximum rate applies. The same
argument holds for the older closed-end
Central Fund of Canada
) , which owns gold and silver in roughly equal proportions. But
some analysts aren't convinced that this structure has the
blessing of the IRS, so you'll want to be careful and consult
with a tax professional before jumping in.
One downside of the closed-end structure is that shares can
trade at a premium to the value of their underlying bullion,
meaning you'll have to pay above then-prevailing spot prices to
get shares. But the tax advantages may well be worth that extra
price for many investors.
A simpler way
Another way to profit from bullion-price moves without worrying
about tax uncertainties is simply to pick mining stocks that
produce gold. Shares of big miners
don't move in lockstep with gold prices, but now that neither has
hedged production, their prospects over the long haul are tied to
the movements of the yellow metal. And there's just about no
doubt at all that long-term capital gains on their shares get the
benefit of lower rates.
Taxes should never be the sole driver of an investment
decision, but it's smart to take taxes into account. The right
gold investment might be able to save you a ton in tax if your
position becomes profitable.
Precious metals investors should be aware of an opportunity
that could have huge potential. Read The Motley Fool's latest
special report on gold to discover the tiny gold stock digging up
massive profits. It's free but only available for a limited
Fool contributor Dan Caplinger likes things that glitter. He
doesn't own shares of the companies mentioned in this article,
although he does own gold and silver bullion coins. Try any of
our Foolish newsletter services free for 30 days. We Fools may
not all hold the same opinions, but we all believe that
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investors. The Fool's disclosure policy is golden.
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