Since the turn of the millennium, the price of
gold and other precious metals has risen
, bringing big profits to those who bought them early in their
bull-market run. But as many people have found out recently, when
it comes time to sell, the taxes you'll owe on your gold gains
can be a lot bigger than you'd think.
some ways to own gold without paying an exorbitant tax bill. But
to do so, you need to avoid a little-known IRS rule governing
precious metals and other collectibles.
Capital gains, gold, and you
On any investment, the profit you make when you sell it counts as
a capital gain. Hold an asset longer than a year, and that profit
becomes a long-term capital gain. Most stocks and bonds currently
enjoy a lower long-term capital gains rate of 0% for taxpayers in
the 10% and 15% ordinary income tax brackets, 15% if you're in
the 25% to 35% brackets, and 20% for top-bracket taxpayers.
But for collectibles, including gold, silver, and other
precious metals, the rules are different. For long-term capital
gains, you'll pay your ordinary income tax rate up to a maximum
of 28%. That higher rate produces a much heftier tax liability,
and given the big gains on gold investments over the past decade,
gold investors have a lot of profits to get taxed.
Moreover, those collectible rates even apply to
many exchange-traded funds that own gold and
. The popular
all get treated the same as gold and silver bullion itself, and
you'll owe the higher rate on gains.
A few solutions
But many tax professionals believe that some special gold and
precious-metals investments have found a way to get the same
beneficial tax treatment as regular stocks. Both
Central Fund of Canada
Sprott Physical Gold
have structured themselves as
passive foreign investment companies
, for which a U.S. taxpayer can elect qualified capital-gain
treatment and pay the lower maximum rate of 0% to 20%.
Another less complicated solution is to invest in gold mining
companies rather than gold itself. Those companies
qualify for preferential capital-gain treatment. But lately,
mining stocks have dramatically underperformed
the price of the precious metals
they produce, so they aren't a perfect solution, either.
Be tax-smart with your gold
Letting taxes dictate how you invest is often a bad idea, but by
being aware of what taxes apply, you can take steps to reduce
your eventual tax bill down the road. Those who picked the wrong
way to invest in gold years ago can only regret the big portion
of their profits that will go to Uncle Sam.
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Fool contributor Dan Caplinger owns shares of Central Fund of
Canada. You can follow him on Twitter: @DanCaplinger. The Motley
Fool has no position in any of the stocks mentioned. Try any of
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