Tags: Gold | Investing | Taxing

Uncle Sam's Laws on Gold Investing Can Be Taxing

By    |   Monday, 06 February 2012 08:58 AM

Buying and then selling gold is far more costly than advertised.

Even with all the hype in TV and radio advertising, billboards and pawnshop signs, everyone understands that making investments have both a risk element as well as costs and fees.

Usually what is missing is any mention of the tax hanging over the investor like “the Sword of Damocles.”

Investors generally think that with so many billions of dollars being invested in all sorts of gold-based or gold-related investments that the tax rules would be well established and understood.

Not surprisingly, these investors are wrong.

When it comes to U.S. tax, nothing, even gold-based investments, is clear and straightforward. It is a system which overwhelms taxpayers and tax professionals with problems and controversy.

Some gold investments are treated as collectibles and taxed one way. Other gold-based investments are taxed like corporate shares. And some fall under a third and fourth type of tax regime.

Collectibles are considered to be certain bullion coins (commemorative and rare), paper or gold certificates, and similar types of gold and gold based investments.

Gold jewelry sales are exempt. Obviously, there is a strong lobby representing the jewelry industry.

Collectibles can be taxed up to a 28 percent capital gains rate if held for a year. If less than a year, then they get ordinary income treatments.

Exchange-traded funds (ETFs) are generally treated as collectibles. But not always.

Some ETFs – GLD and PHAU for example — are treated as “Grantor Trusts.” This means that the grantor/investor is treated for tax purposes as a pro-rata holder of an undivided interest in the actual underlying physical gold.

Tax complications easily arise if the ETF uses futures contracts to mimic the underlying direct gold acquisitions. Then things get nasty.

When this occurs the ETF grantor/investor is subject to the “mark-to-market” tax regime. When the ETF sells, then it’s treated as a deemed sale by the grantor/investor as if grantor investor directly sold the gold.

Many investors think they have a better investment position if they invest in gold-mining stocks and precious metals closed-end funds.

These precious metal funds usually are, in turn, invested in gold-mining stocks.

Tax is recognized when the shares of stock held by the investor are sold. The rate on long term capital gains is 15 percent. This year nothing will be due if the taxpayer is in the 10 percent ordinary income bracket.

What happens if the investor buys into a foreign fund? That will cause a major tax issue. That fund will be treated as a Passive Foreign Investment Company (PFIC) and the shares will be treated to mind-numbing U.S. foreign tax complexities.

What this means is that in order to make sure you are compliant for U.S. tax purposes, you are going to pay a lot more in taxes and tax return preparation fees.

Many financial advisers recommend buying gold and gold-based investments in an IRA or 401(k) to get tax deferred build up on income and gains. Is that a good idea?

Like everything else regarding U.S. tax laws, the answer is — it depends.

Lots of people think that they can just buy any sort of gold coins and get a tax deferral.

Not the IRS. Regular coins must be 24 carat gold with 0.995 percent fineness. Bars must have 0.999 percent fineness. If not, then the IRA or 401(k) won’t work. Congress doesn’t like tax deferral.

When it comes to any investment, it’s the after-tax yield that is important. When it comes to gold and gold-based investments, figuring out the impact of U.S. income taxes can be murky at best.

What is clear is that when you are making any gold-based investments, always remember that gold can be taxing.

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Monday, 06 February 2012 08:58 AM
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