Gold Investing: Understanding Tax Implications & Considerations

When sharing advice about money and investing, many people recommend owning gold.

“It’s never been worthless,” they’ll say, along with, “They’re not making more of it.”

They’re right, of course, for the most part: Gold has held value for more than 5,000 years, at least, and maybe longer since the historical record gets kind of spotty beyond that.

That’s about 20 times longer than the United States has existed let alone issued currency.

But there are downsides to using gold as an investment, and one of them is the tax rate.

The Tax Implications of Gold Investing

The Internal Revenue Service treats gold as a collectible, just like your collection of antique English tea kettles or vintage vinyl.

The money you net selling gold in most of its forms will be taxed at 28 percent which is higher than the capital gains rate for other kinds of investments for most investors.

The 28 percent rate applies only to long-term gains in gold. The IRS defines long-term gains as money you earn from selling assets you’ve owned for more than a year.

If you have not owned the gold for more than a year, your gains will be taxed as normal income.

Forms of Gold Taxed at the Collectible Tax Rate

Though trading in gold has been around since the days of antiquity, we moderns have found ways to make owning gold more complex.

Yes, you can still buy physical gold including bars, coins, and bullion, but there are less physical ways to invest in the permanence of gold, and they tend to be more convenient:

• Certificate gold. When you buy gold but have it stored for you in a vault, as with the service offered by TIAA (formerly EverBank), you may never see the metal you own. Instead, you get a certificate representing your investment. This so-called paper gold is also considered a collectible and taxed at 28 percent.
• Electronic gold: Companies like Bullion Vault or GoldMoney allow you to buy and sell gold and other precious metals without actually handling the metals. Still, long-term gains will be taxed at 28 percent.
• Gold ETFs: Like stock-based exchange-traded funds (ETFs) gold ETFs allow you to invest in gold shares without owning any actual gold. This is a great way to get started because you can trade gold shares without dealing with the hassle of owning, storing, insuring, securing, and selling precious metals. Long-term gains from gold ETFs will still be taxed at the collectible rate of 28 percent.

What Forms of Gold Gains Dodge the Collectible Tax Rate?

Long-term gains from gold and other precious metals, whether from physical ownership, certificate ownership, or even owning tradable shares, should be reported as a collectible and taxed as such.

So how can you invest in gold but avoid the 28 percent rate on long-term gains?

One way is to invest in gold indirectly by buying stock in a mining company. Since you don’t own any actual gold, your gains would be taxed at normal capital gains rates.

Though buying stocks in a gold mining company wouldn’t mean you owned any actual gold, you’d still be connected to the gold market: Increases in the price of gold could result in more value to your shares.

Be sure to look for a well-managed mining company to reduce the amount of overhead you’d be financing through your stock investment.

More advanced investors may want to look into gold futures. Commodities and futures markets are more volatile and complex than most other investments.

It’s best to work with a broker or financial planner who knows your needs, strategies, and concerns.

But since you’d be investing in future gold transactions and not gold itself, your earnings shouldn’t be subject to the collectible rate.

How Does the IRS Know About Your Gold?

Federal tax law, of course, requires you to report your own capital gains on your tax return, including long-term gains from your gold, shares of gold, or gold certificate ownership.

If you do not report the gains and the IRS finds out about them through an audit or other sources (a gold dealer’s records, for example), you could face penalties, late fees, and interest charges.

When you sell gold ETF shares or forms of certificate gold, you can bet the IRS will know about your investment.

Even with physical gold sold discreetly, in the long run, it’s easiest, cheapest, and required by law to report your gains or losses accurately and settle up with Uncle Sam at least once a year.

What if I Sell Those Old Gold Earrings?

If you sell some of your gold jewelry, especially pure 24-karat gold, should you report the sale to the IRS?

This is actually a pretty complicated question. Current tax law does not require dealers to report jewelry sales to the IRS in the same way it requires a report of gold bars or bullion sales.

So, some investors like to keep gold in the form of 22- to 24-karat necklaces, rings, or earrings to shield their investments.

A tax professional can help you answer specific questions, and if you’re concerned about the tax implications of selling your jewelry, I’d definitely check with a professional in your area before making any significant decisions.

What About Collectible Tax?

Antiques dealers and estate auctioneers frequently come across old gold or silver coins with potential value beyond their metallic content.

The IRS will levy capital gains taxes on this kind of gold investment just like it would for other kinds.

The market for this kind of investment can be more volatile and dependent on buyer preference, however. So you might end up paying more than you should.

If you’re using precious metals as a component of your investment strategy, I recommend just keeping things simple: hold gold because gold has value, not because of its value to collectors.

Unless, of course, you’re into collecting. In that case, you’ll have a hobby that can also strengthen your portfolio.

Taxes Aside, Is Gold a Good Investment?

Most financial and tax advisors I know give this advice fairly often: When you’re investing, you shouldn’t let the IRS make your decisions for you.

In other words, if you’d like to invest in gold and expect to earn capital gains, don’t let the potential for higher taxes scare you away.

Gold has outlasted many, many other kinds of investments over the past five millennia, and even in our age of interconnected financial systems, gold continues to have value and act as a stabilizing force.

Rather than thinking about all the reasons you should add gold to your portfolio, which are fairly obvious, I find it more helpful to point out the times when you should not buy gold:

Don’t Buy Gold Because of Fear

Whenever we experience a recession or even a correction in the markets, you can expect to see an uptick in the price of gold.

This happens because many people think of gold as a refuge from modern economic vulnerabilities. For example, the record high price for gold was set in 2011 in the midst of the Great Recession.

The same thing can happen after political upheaval, either in the United States (think 2016 election) or in other developed or rapidly developing economies.

When things settle down and the market gets back to normal, the price of gold stabilizes and your investment immediately is worth less than before the market volatility.

Occasionally, you’ll hear about the government confiscating private gold which can drive up the price. It’s true that FDR attempted this back in 1933 as the Great Depression raged.

But in modern times these fears generally have no validity. They do tend to benefit brokers who earn commissions, though.

Don’t Buy Gold Without Considering Extra Costs

Gold has a cost of ownership that can cut into your gains:

• Brokers’ commissions: Unless you find a buyer you know and trust, you’ll need someone to broker a sale. Expect to pay for this service each time you make a transaction.
• Storage fees: Your sock drawer may not be the safest place to keep your gold. Keeping it in storage at a bank would be safer.
• Added security or insurance for self-storage: If you do plan to store gold yourself, you may want to increase your home security and add some extra home insurance for personal property.
• Gold ETF maintenance fees: Like any exchange-traded fund, expect to pay fees to the group managing your gold ETF.

To help keep costs under control, be sure you’re working with a reputable dealer who won’t look for ways to increase his or her own profits at your expense.

These costs can cut into your capital gains, especially if you’re investing smaller amounts. The good news is the IRS taxes your net gain and not the gross capital gains.

Avoid Going Into Debt to Buy Gold

Trading in cash or other assets for gold is one thing, but buying gold using borrowed cash can cost you a lot.

People tend to do this when the price of gold goes down. They seem to think it’s the right time to buy and that their temporary shortage of available cash shouldn’t stop them. This is fine if your cash shortage really is temporary and you can pay off the loans quickly.

More likely, though, the interest you’re paying on your loan will surpass the capital gains you earn, especially after you pay taxes on the earnings.

Be Wary of Advertised Sales

Companies advertising on TV or even making cold calls seem to use fear as a sales technique. They’re also more likely to sell on terms that benefit them.

If you’re new to gold, start with a reputable dealer and stay in control of the process.

Bottom Line: An Ancient Asset in Modern Times

While taxes shouldn’t dictate your decisions, you should keep the tax implications in mind as you buy, own, and sell gold.

Gold by itself will not result in more income. Its value to you will depend on the market and your decisions about whether to sell your gold or gold shares.

You can go overboard and make gold too central to your portfolio, but most investing gurus will tell you there’s room in your financial life for gold and other precious metals.

Speaking of the experts, be sure to do your own research and consult with a knowledgeable investment professional or a tax advisor before making any decisions. I am neither, and this article shouldn’t be construed as advice geared specifically for you.

Photo credit: digitalmoneyworld