Why is gold taxed so high?

Gold and silver ETF owners face a maximum tax rate of 28% on profits. That's higher than stock taxes. Exchange-traded funds backed by precious metals such as gold and silver, as well as IRA Gold accounts, are considered collectibles for tax purposes, according to accountants. That means they have a maximum federal tax rate of 28% on long-term capital gains. The IRS taxes capital gains on gold in the same way it does on any other investment asset.

However, if you have purchased physical gold, you are likely to owe a higher tax rate of 28% as an object of collection. Avoid investing in physical metal and you can minimize your capital gains taxes at the ordinary long-term capital gains rate. And when possible, hold your gold investments for at least a year before selling them to avoid higher income tax rates. The restriction was intended to reduce gold hoarding, which according to the gold monetary standard was stifling economic growth, and lasted more than 40 years before disappearing in 1975. Lucas' annualized after-tax return increases by more than two percentage points when he uses a traditional IRA for his investment in gold mutual funds and more than three percentage points above a brokerage account when using a traditional IRA for his investment in gold coins.

A gold ETN does not physically hold gold, but at maturity it produces a return equivalent to that of an investment in gold. The typical approach to investing in gold futures contracts is by purchasing gold futures ETFs or ETNs. With a little planning, investors can preserve a greater part of their return in gold by investing in gold that receives the LTCG treatment or investing in an IRA. The net investment income tax of 3.8% may be applied to the gold earnings in the brokerage account of taxpayers with higher MAGI than in these examples.

Gold mining stocks, gold mutual funds and gold mining ETFs offer investments in gold, but with limited investments in physical gold ingots. You get more than 3.2 percentage points of annualized return after taxes when you use a traditional IRA instead of a brokerage account for your investment in gold mutual funds and more than 4.2 percentage points of annualized after-tax return for your investment in gold coins. Emma and Lucas's results, shown in Figure 3, indicate that the after-tax returns on investments in gold in a traditional IRA far exceed those of investments in gold in a brokerage account or in a Roth IRA. Gold exchange-traded funds (ETFs) offer an alternative to buying gold bars and are traded like stocks.

And since gold is an investment asset, when you sell your gold and make a profit, it's taxed as capital gains. The example assumes that the costs and fees of buying, owning and selling gold coins, gold mutual funds and gold futures ETFs are the same. Gold has attracted investors for centuries because of its rarity and beauty, which explains why nearly half of the world's demand for gold comes from the jewelry industry (World Gold Council, Gold Investor, vol. Earnings from investments in physical gold and physical gold ETFs outside of an IRA are taxed as collectibles.

The after-tax annualized return on gold coins is the lowest, approximately one percentage point lower than that of the gold investment fund, which receives the LTCG treatment. In the case of brokerage accounts, an investment in gold mutual funds is more likely to offer a higher after-tax return than gold coins or a gold futures ETF. .