Give Unto Caesar - What to Pay When You're Selling
Proper planning with your finances is incomplete until you consider the endgame consequences of your investment decisions today. So, what are the tax consequences of selling gold, gold ETFs, and gold stocks?
There's lots of conflicting and inaccurate tax information on the Internet about this. We know of one site that claims the sale of silver Eagles is exempt from capital gains tax due to some obscure law (not true). So, let's nail down the current tax rules for selling gold in the U.S.
[The following information pertains to U.S. taxpayers only and is not intended as nor should be considered personal tax advice. Always consult a financial planner and/or tax professional before investing.]
» The IRS considers gold a "collectible" and will tax your capital gains at a 28% rate. This designation includes all forms of gold (other than jewelry), such as...
- All denominations of gold bullion coins and numismatic/rare coins, gold bars, and gold wafers
- ETFs like GLD, SLV, etc. (closed-end funds have different rules; see below)
- 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
- All forms of pool gold, rounds, and commemorative coins
And the same designation and rules apply to silver, platinum, and palladium.
» "Reporting" requirements can be confusing. It is true that precious metals dealers aren't required to report certain small sales to the IRS - but that doesn't relieve you of the obligation. If you sold one gold or silver coin to your local dealer, he is not obligated under current regulation to report the sale. But selling at a profit requires you to report it and pay 28% tax on your gain.
Keep in mind that the Patriot Act obligates a dealer to report any "suspicious customer activity." Therefore, don't expect a wink from your dealer if you proclaim you won't be reporting your sale or ask him to "book" only half the coins you sell him. There are people sitting in prison who've tried this.
» Gold stocks are not designated as a collectible and are therefore subject to the standard capital gains tax rates like all other stocks.
» Gold jewelry sales are not reportable. This makes the Heirloom Collection an attractive consideration and an excellent diversification maneuver (for both financial and romantic reasons!).
» We wouldn't advise making your investment decisions based solely on tax considerations. You should own both gold and gold stocks for different reasons - gold for wealth protection and gold stocks for profit potential.
» There's a lobbying arm for our industry, the Industry Council for Tangible Assets. Their efforts are mostly for dealers, but their website contains valuable information on this topic.
PFICs: Blessing or Curse?
For U.S. investors, there's one more tax consideration if you own, or plan to own, a closed-end fund (whether it's precious metals or otherwise).
For example, the Central Fund of Canada (which holds gold and silver bullion) is considered a Passive Foreign Investment Corporation (PFIC) for U.S. investors. This is a complex topic, but what I learned could save you some dinero now and some hassle later if you own a foreign closed-end fund like this one.
Keeping it simple, if you own CEF, you can qualify for the standard capital gains tax rates, instead of the 28% collectibles rate, if you file a timely and valid Qualified Electing Form, or QEF. There are several options you can take with a PFIC, but this is the most common election.
Even if you don't sell the fund in any given year, you must file this form every year. If you don't complete an annual QEF or make one of the other elections, you could get hosed when you eventually do sell because your gain will be considered ordinary income, forcing you to pay interest and penalties on top of the regular tax.
You can hold a PFIC stock for years without paying tax, but if you haven't made a QEF or other election, you get the bad result we're describing when you sell. Further, if the PFIC company reports income in a given year, this income is reportable and taxable as regular income that year, even if no stock was sold and even if the stock ended down on the year.
The point here is obvious: don't blindly buy into a PFIC.
The QEF benefit is clear: you can cut your tax liability up to 46%, the difference between the 15% long-term capital gains rate and the 28% collectibles rate. Yes, capital gains rates are scheduled to rise next year, but this option still reduces your tax liability.
A successful investor is an informed investor, and you should read the prospectus of any closed-end fund before buying. And if you don't want to mess with the tax hassle, use an ETF instead.
What ETFs and closed-end funds do we recommend? If you like this kind of fact-based research, you might also appreciate our recent analysis of the best gold and silver ETFs, along with our just-released 2010 Silver Buying Guide. For only $39, you can access all our research and recommendations for one year, risk-free. To learn how the right stocks and funds can give you considerable leverage to gold itself.