Investing in gold can be a great way to diversify your portfolio and protect your wealth. However, it is important to understand the tax implications of owning gold. Fortunately, there are ways to minimize the tax burden associated with gold investments. One way to avoid taxes is through a 1031 exchange.
This allows you to reinvest money from your gold sale by buying more gold, and if you meet the IRS requirements, all of these transactions will not be taxed. It is important to note that the IRS does not treat gold as a special asset class, so no specific rules apply to gold when it comes to capital gains taxes. The best way to minimize your tax bill is through intelligent global tax planning. This applies not only to gold coins and bars, but also for most ETFs (exchange-traded funds) that pay a 28% tax.
Many investors mistakenly assume that because the gold ETF is trading as a stock, it will also be taxed as a share, which is subject to the long-term capital gain rate of 15% or 20%. In addition to the costs associated with owning gold, such as trader's profit margins and storage fees for physical gold, or the management fees and trading costs of gold funds, taxes can represent a significant cost. Fortunately, there are ways to reduce the tax implications of owning gold and other precious metals. Individual investors can benefit from Sprott Physical Bullion Trusts, which offer more favorable tax treatment than comparable ETFs.
Because these trusts are domiciled in Canada and are classified as Passive Foreign Investment Companies (PFIC), non-corporate investors in the United States are eligible to obtain standard long-term capital gain rates for the sale or redemption of their holdings. These rates are 15% or 20%, depending on revenue, for units held for more than one year at time of sale. Another way to avoid taxes is by investing in funds and assets that don't buy physical gold. ETFs and mutual funds that specify this approach in their investments can provide more favorable tax treatment than buying physical gold.
Assets such as futures contracts and options are not considered investments in physical assets, so the IRS treats them as ordinary capital gains with a maximum rate of 20%. Ingots are a collector's item according to the tax code, so investors are not eligible for regular treatment of long-term capital gains. In contrast, bullion gains that hold the longest in a year are taxed at a maximum tax rate of 28%. Gains held in bullion for one year or less are taxed as revenue. Finally, it is important to note that tax evasion is perfectly legal.
Investors can use a legal method to avoid paying sales tax on their purchases of precious metals by investing in funds and assets that don't buy physical gold. Under British law, gold sovereigns and Britannia gold coins are exempt from capital gains tax because they are considered British legal currency. To learn more about minimizing the tax implications of owning gold, ask your financial advisor or Sprott representative for more information.