Tax On Gold: Don't Overpay Your Gold Taxes!
Many investors have opted for gold as a financial investment in recent years. This is because gold can protect the value of their money against rising inflation, geopolitical risks, and a possible upcoming recession. For investors looking at buying gold, it’s important to know the tax implications that come with investing in the precious metal.
Here are the ins and outs of the IRS regulations on gold and the tax implications from selling your precious metal investment.
Understanding your potential tax liability is an important consideration with any investment.
Taxation on Precious Metals Depends on How Long You Hold Them
Since gold is considered a collectible, it is taxed at maximum rate of 28% like art, stamps, and antiques rather than traditional investments like stocks or bonds. The IRS charges higher tax rates on collectibles than other investments, which usually average 15% to 20% if held for more than a year.
If you bought gold as an investment and took a profit when you sold it, the IRS wants its slice of the pie. How much you owe depends on how long you held your precious metal investment. If you sell your metals within a year of buying, the gains will simply be taxed like normal income. In other words, it will be taxed at the rate of your income tax bracket. If you hold your metals for a year or more before selling, the tax rate is capped at 28%.
IRS Rules for Taxes on Gold
The Internal Revenue Service classifies precious metals like gold as collectibles, similar to art or antiques. Gold bullion bars and coins also fall into this category. If you actively trade, buy, hold and sell gold, or receive gold as a gift, you may be subject to paying taxes on your profits.
With gold bars and gold coins, you must report your gains to the IRS. Taxable gain on gold is determined by taking the total sales price of the gold you sold and subtracting your cost basis from that amount. The cost basis is your original cost to buy them, plus any costs incurred to store or hold the asset.
Gold is reported in Part I of Schedule D under Short Term Capital Gains and Losses for assets held for less than a year and in Part II of Schedule D under Long Term Capital Gains and Losses for assets held for longer than a year.
Can You Avoid Paying Any Tax on Gold?
No, there is no legal way to avoid paying taxes when you sell your gold. If a gold dealer promotes or advertises any trick, loophole, or "secret" to circumvent paying taxes on your gold sale, that is a massive red flag!
However, with proper tax planning, you can make sure your gold investment in the most tax-efficient manner possible. This way you avoid paying any excess tax when selling gold.
The basic strategies for minimizing your tax burden on gold are discussed in greater detail in the following sections.
How to Minimize Capital Gains Tax from Selling Gold
Gold investors will pay capital gains taxes when they make a profit. It’s important to know the tax implications on gold because they are different from tax considerations of traditional investments. Taxes are additional expenses related to investments. So, the higher you pay in taxes, the less profit is made. Gold is subject to a 28% long term capital gains tax rate by the IRS. This rate is higher than the profits made from other investments like stocks held longer than a year, which tend to be taxed at a 20% rate.
To avoid the higher rate of 28% and target the lower 20% taxed rate, gold investors can seek mutual funds or ETFs that don’t purchase physical gold, like options and futures contracts. In this case, the IRS will classify it as ordinary income, once the assets are sold to secure a profit.
American Gold Buffalo coins are another popular choice for precious metal investors.
The IRS has different rules for short-term and long-term gains on investments. For example, if an investor buys $1,000 worth of gold on January 1st and sells it on March 1st for $1,100 dollars, she will owe taxes on her profit of $100 dollars based on her personal marginal tax rate. However, if she sold her gold after owning it for more than a year (a long-term gain), she would owe less in taxes and take home a higher profit because long-term capital gains are generally taxed at a lower rate than short-term capital gains.
The United States has one of the highest taxes on gold in the world. Many investors in other countries pay a much lower tax or none at all when trading in gold.
Nonetheless, if you hold onto your gold for longer than one year, you can avoid paying taxes on your profits until you sell it for more than its original purchase price. The IRS also allows investors to deduct losses from selling their gold holdings below their original cost basis from their taxable income. To decrease the tax burden and invest more into gold, you can spread out your gold purchases categorized by how long you plan to hold the gold before selling.
Taxes When Buying Gold
Additional sales taxes on precious metals may be applied by the state you reside in at the time you buy gold. These tax laws differ between each U.S. state.
In some cases, there is a threshold—for example, $1,000—that you have to spend on precious metals in order for the sale to be tax-exempt. Bizarrely, in a few states, the opposite is true: the purchase of gold or silver will be tax-free until you reach some arbitrary threshold. Sometimes the form of the gold, silver, or platinum you buy will impact its accrual of sales tax. (Use the link at the top of this section to check your own state's laws.)
Government-issued coins with a face value, such as American Silver Eagles and American Gold Eagles, are exempt from any sales taxes. This is because they are legal tender money and are priced based on the value of their metal content rather than any numismatic value. The same is true for older coins made of precious metals so long as they are not rare coins.
Investors pay no sales tax when they buy legal tender coins.
One positive development in this area has been the growing adoption of state sales tax laws that largely exempt gold and silver from taxation. As of the time of publishing, about three-quarters of the states in the U.S. have implemented such laws or have no state sales tax whatsoever.
Takeaway on Gold Taxes
For gold investors, it is important to be aware of the tax consequences so they can make informed decisions on when to secure their gains. Investors should keep accurate records of their gold transactions and consult with a tax professional if they have any questions. Gold investors can substantially reduce the amount of tax by investing in gold bullion coins and investing for the long term. Investors should consult their tax adviser for details on how to pay their taxes on gold.
Written by Paulina Likos
Read more about investing in precious metals from the Gainesville Coins authors:
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