To some advisors, gold may be considered an alternative asset because of its non-correlation with traditional investments and gold’s potential for substantial returns. To all advisors and clients, though, gold should be considered an alternative asset when it comes to taxation, as some types of gold transactions get unusual tax treatment.
“Short-term gains on gold investments are taxed as any other short-term capital gains, subject to ordinary tax rates,” says Tom Scanlon, president of Borgida & Company, an accounting and consulting firm in Manchester, Conn. Depending on the investor’s overall income, that tax rate ranges from 10% to 39.6%. As Scanlon notes, the 3.8% Medicare surtax also may apply to such gains if they’re reported by high-income taxpayers.
The difference arises when gold investments are sold at a gain after a holding period of more than one year, the dividing line for long-term capital gains. “Some types of gold don’t qualify for the low tax rates on long-term capital gains,” says Scanlon. “Instead, they’re taxed as collectibles.” Gold bars and coins (even non-numismatic coins) are considered collectibles; the same is true for ETFs that hold physical gold, such as SPDR Gold Trust (GLD) and iShares Gold Trust (IAU).
“Long-term gains of collectibles are taxed at ordinary income tax rates,” says Scanlon, “but there’s a 28% maximum tax rate.” Thus, long-term gains of collectibles may be taxed at 10%, 15%, 25%, and—for all clients in higher tax brackets—at 28%. Clients who might expect to owe the typical 15% tax rate or even the top-bracket 20% rate on long-term profits from sales of American Eagle gold coins could owe tax at 28% instead. Again, the 3.8% surtax may be added.
What’s more, the 0% tax rate for low-bracket investors doesn’t apply to gold investments that are taxed as collectibles. Suppose Joe and Joan Smith are retired, with $50,000 in taxable income this year. The Smiths could take $20,000 worth of long-term gains on most securities and owe 0% tax on the trades because they would stay in the 15% ordinary tax bracket, which goes up to $73,800 this year. “However,” says Scanlon, “if they take that $20,000 gain on GLD shares, for example, they would owe 15% tax, not 0%, under the collectibles rules.”
ACCEPT OR ADAPT
One reaction to these rules is to stick with gold investments that are treated as collectibles and pay the higher tax on any long-term sales, accepting the steeper tax rate in return for the possible advantages of holding gold.
Another approach is to invest some or all of a gold allocation to gold mining stocks or funds of such miners. “Mining stocks are treated like any other stocks,” says Scanlon, “so the favorable long-term capital gains tax rates apply.” (The 3.8% surtax also may be owed.)
Gold mining shares aren’t pure plays on the price of gold because they’re subject to company risk and to the fortunes of the overall stock market. Nevertheless, these companies’ profits and stock prices often move with the price of gold—miners’ shares generally boomed in the first decade of this century as gold soared--so mining equities may offer a way to participate in this asset class without the tax surprises.