With the general economic uncertainties in recent years, and especially, the most recent stock market crash concurrent with S&P’s downgrading of the US debt, more investors are turning to gold and other precious metals as a perceived safer investment. One of the more popular investments that we’ve been seeing in recent years is SPDR Gold Shares (GLD), an exchange-traded fund (ETF). However, investors need to be aware of the tax treatment of these types of investments.
Q: Why is the tax treatment for these precious metal ETFs different than other securities?
A: The IRS considers gold a “collectible” and taxes your capital gains at a 28%, rather than 15% rate. This designation includes all forms of gold (other than jewelry).
Q: But my financial institution’s Realized Gain/Loss report at yearend already segregates the investments between short and long-term. Are you saying that those long-term gains are still subject to 28%?
A: Yep.
Q: How do I know which other investments are subject to the 28% tax?
A: As a general guide,
- All denominations of gold bullion coins and numismatic/rare coins, gold bars, and gold wafers
- ETFs like the aforementioned GLD, iShares Silver, (SLV), iShares Comex Gold Trust (IAU)
- Any electronic form of gold like GoldMoney and Bullion Vault
- Any “paper” or certificate forms of gold, such as Perth Mint Certificates and EverBank accounts
Generally, the ETF’s prospectus will discuss the tax treatment. To paraphrase the SPDR Gold Shares (GLD) prospectus, GLD is structured as a grantor trust, not a mutual fund. A grantor trust is ignored for tax purposes so that the investor is treated as owning a pro-rata share of the underlying holdings, not the entity. Therefore, the long-term gain will be taxed at a maximum rate of 28%. So, this is a classic example of caveat emptor – “buyer beware.”
Q: You didn’t mention PowerShares DB Gold or Silver Funds. Do they work the same way?
A: The PowerShares DB Gold Fund (DGL) and PowerShares DB Silver Fund are examples of funds the objective of which is to reflect the performance of the underlying precious metal using futures, rather than just owning the gold or silver bullion. But ETFs that use futures to achieve their results, whether they track gold, silver, corn, copper or currencies, come with their own tax headaches.
Unlike the precious metal ETFs, which are organized as grantor trust, these ETFs are structured as limited partnerships, most commonly known to the public as Master Limited Partnerships (MLPs). Thus, the investor will receive a K-1 at the end of the year, which will have the various tax treatments of the partnership’s underlying investment portfolio detailed in the K-1, rather than on a 1099.
Q: Is there anything I can do to avoid this higher tax rate?
A: If you currently hold these types of precious-metal ETFs and want to sell you may want to consider the tax effects of any capital loss carryforwards or selling other losing securities in your portfolio to offset the gains from these precious-metal ETFs. Another way to defer and possibly reduce the taxes is to hold precious metals ETFs in a tax-deductible IRA or a Roth IRA, where the ultimate taxation will be at either ordinary rates, or not at all, respectively.
Although you should always consider the tax treatment of these different investments, don’t let the tax tail wag the investment dog. For more information on how these investments might affect your personal tax situation, please contact us.
