Why is my Gold ETF a “collectible”?

Your gold watch, sparkling gems, and ETFs have tax implications in common.

It's Thursday! Let's talk TAXES… 

In recent years, there has been significant interest in physical gold and other precious metals. If you're an investor who has embraced the precious metal trend, it's important to know that US tax law categorizes holdings in precious metals as "collectibles".

This classification applies whether you hold coins, bars, or even ETFs . When you decide to sell, your gain (or loss) will be the difference between the selling price and your cost basis (the price you paid) for the metal. Capital gains from selling precious metals held for more than one year are taxed at a capital gains rate of up to 28%. If held for less than one year, capital gains are taxed at (often higher) ordinary income rates. If your gold or silver ETF is classified as a "collectible" by the IRS, your long-term gains (over one year) will also be taxed at 28%, whereas short-term gains (held for one year or less) are taxed as ordinary income.

Consider an example where you have invested in an ETF with a cost basis of $50,000, and its current value is $88,000. If you have held this investment for more than a year and decide to sell it now, you would have a capital gain of $38,000, with $10,640 owed in taxes. However, if you are a high-income earner and held the investment for less than a year, your capital gains taxes could be as high as $15,500.

In sum, the tax rate for capital gains on precious metal investments will be much higher than the 15-20% max you pay for typical stock ETFs.

If you must invest in gold & collectibles, be aware that individual retirement accounts (IRAs) and 401(k)s are not permitted to invest in collectibles such as gold coins, gems, art, antiques, and stamps. Perhaps using a “self-directed IRA” can be an option for some investors. This approach can be complex, however, as it involves specific rules, fees, and quality standards that must be adhered to by the custodian and independent trustee.

To discover additional tips on how to minimize high tax rates on your collectibles and other investments, be sure to check outTax Thursday insights HERE!