Your Guide to Taxation on Gold and Silver Investments

- October 30th, 2019

Interested in gold and silver investing? INN has outlined the ways in which your yellow and white metal investments may be taxed.

As gold and silver continue to prove their worth as sound investments, market participants should know how these investments are taxed. 

Both the yellow and white metal are subject to various taxes during different stages of the exploration and production cycle. Additionally, importing and exporting and purchasing and selling the metal comes with taxation.

Read on for a breakdown of which gold and silver investments are taxed in the US, how they are taxed and what type of tax breaks may be available for investors.

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Types of gold and silver investments and how they are taxed

While the majority of gold and silver investing comes with a certain degree of taxation, there are different levels of tax based on how market participants decide to invest in the precious metals. Below are the different ways one can invest in the precious metals and the taxes associated with those investments. 

Physical gold and silver

Physical gold investors are generally looking for items that are 0.999 fine. Several products fit this description, and one of the most preferred is gold bullion coins, such as the South African Krugerrand or the American Gold Eagle.

Another option is gold rounds, which are similar to coins, but are not legal tender. Both gold coins and gold rounds come in various sizes, usually ranging from 1/10 ounce to 1 ounce, though other less common sizes are available.

Gold bars are another popular option. They also come in a variety of sizes, and as choices can range from a 1 gram bar to a 400 ounce bar, this category of products can accommodate a range of investors.

When the objective is to get the most metal for the least money, it’s generally best to shop for gold rounds and gold bars, which tend to be cheaper than gold coins of the same weight. The premium for gold coins is higher because of the credibility that they receive from being fabricated by government mints and because of the design detail on them.

Another factor that may need to be considered is the amount to be invested. Large investments may be best made in bars since larger sizes are available. Further, it is often easier to manage large products than it is to manage an array of smaller gold items.

However, physical investors need to also give forethought to occasions when they may want to sell their gold. Large products will require liquidating a larger portion of one’s gold portfolio, and such products may be more difficult to sell in some instances. Individuals making ongoing or significant investments may therefore want to consider purchasing gold in various weights.

The same is true when investing in physical silver, as it is sold on the spot market, meaning that in order to invest in silver this way, buyers pay a specific price for the metal and then have it delivered immediately. This is a popular way to go about investing in silver: through purchasing bullion products such as bullion bars, bullion coins and silver rounds.

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These precious metals (as well as platinum and palladium) are seen as capital assets, specifically classified as collectibles, to the Internal Revenue Service (IRS). Owned physical gold and silver, whether it be in the form of bullion coins, bullion bars, rare coinage or ingots, is subject to capital gains tax. These taxes come into play when selling the yellow or white metals.

Capital gains tax on physical gold and silver is equal to an investor’s marginal tax rate, up to a maximum of 28 percent. That means that market participants in the 33 percent to 39.6 percent tax brackets are only required to pay 28 percent on the long-term gains from their physical precious metals sales.

For example, if you purchase 100 ounces of physical gold today at US$1,330 per ounce and two years later you sell at US$1,500 per ounce, you will find yourself in the 39.6 percent tax bracket but will only pay fees of 28 percent. However, for investors within the 10 to 25 percent bracket, gold and silver assets will be taxed at the standard rate of 10 percent, 15 percent, or 25 percent. 

It is worth noting that the 28 percent maximum is applicable to long-term capital gains since short-term capital gains on precious metals are taxed at ordinary income rates.

Gold and silver ETFs

Like all other exchange-traded funds (ETFs), gold ETFs and silver ETFs act in the same manner as individual stocks, meaning that investing in these ETFs is similar to trading a stock on an exchange.

There are two main types of gold and silver ETFs: those that track any price changes that the metal goes through and those that deal with investing in gold or silver companies.

ETFs that follow the price of the yellow and white metals give investors access to gold and silver by holding either physical gold or silver bullion or gold or silver futures contracts. It is important to keep in mind that investing in these ETF platforms does not allow investors to own any physical gold or silver — even an ETF that tracks physical gold or silver cannot be redeemed for the tangible metal.

ETFs that invest in gold or silver companies provide exposure to gold and silver mining, development and exploration stocks, as well as gold or silver streaming stocks.

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In terms of taxation, long-term capital gains from selling gold and silver ETF shares are subject to a 28 percent maximum federal income tax rate rather than the standard 20 percent maximum rate. This is due to the fact that the gains are considered to be from selling collectibles.

However, short-term gains made from selling gold or silver ETFs are subject to a maximum federal rate of 39.6 percent. Additionally, these gains could get slapped with the 3.8 percent net investment income tax, and a state income tax may also apply.

Kevin McElligott, managing director of Australia at Franco-Nevada (TSX:FNV,NYSE:FNV), warns that these fees can become bothersome, telling the Investing News Network via email, “ETFs actually cost you money in annual management fees.”

Gold and silver stocks

Like all publicly listed stocks, gold companies issue shares that are available for investors to trade. When you purchase shares of a gold stock, you are essentially purchasing a stake in the company, making returns or losses from its profits.

There are two main paths to take when purchasing from companies with gold mines. One way of obtaining shares is by purchasing them from major mining companies like Barrick Gold (TSX:ABX,NYSE:GOLD) or Newmont Goldcorp (TSX:NGT,NYSE:NEM). The other way is investing in a junior miner such as Great Bear Resources (TSXV:GBR,OTCQB:GTBDF). While both avenues have their pros and cons, it’s worth noting that investing in a junior gold stock can be inherently risky. Since these companies often fail due to the risks associated with exploration and development, you stand a greater chance at also taking on a loss. 

Finally, market participants can also obtain gold shares through investing in gold streaming and royalty companies, such as Wheaton Precious Metals (TSX:WPM,NYSE:WPM).

Although no stock is 100 percent foolproof, investing in a successful mining company can alleviate some of the stress of a down market when you keep in mind that if a company’s share price goes down, it becomes more affordable to purchase and investors can more than likely anticipate that it will rise again.

Silver stocks are purchased in the same manner and through the same channels as gold stocks and therefore are taxed in the same way.

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In terms of tax on gold and silver stocks, long-term gains from selling these stocks are subject to the standard 20 percent maximum federal rate, while short-term gains will face a maximum federal rate of 39.6 percent. For investors who find themselves in higher income brackets, there is potential that gold and silver stocks will also be hit with the 3.8 percent net investment income tax as well as state income tax.

How to report tax on gold and silver investments:

Market participants who choose to sell precious metals in the US for a profit are required by US law to report that profit on their income tax return, regardless of whether or not the dealer has any reporting obligation. When selling gold and silver investments within the US, there are two different sets of reporting guidelines — one applies to the dealer through which you sell, and the other applies to the investor.

It is important to know that taxes on the sale of the yellow and white metals will not be due the exact moment that the sale is made. Instead, sales of gold or silver need to be reported on Schedule D of Form 1040 on your tax return. Depending on the type of metal you are selling, Form 1099-B must be submitted to the IRS when the sale closes, as such transactions are considered income. The tax bill for all of these sales is due at the same time that a standard income tax bill is due.

There will be times when a dealer is required to file a form 1099-B with the IRS in order to report proceeds paid to a non-corporate seller of gold and silver. This is done because its helps the IRS determine whether investors have properly reported income from gold and silver sales on their tax returns. The IRS has specific rules that determine which sales of precious metals require the dealer to file this form, and the International Council for Tangible Assets (ICTA) has published guidelines for when the dealer must submit the 1099-B form.

When it comes to selling gold and silver overseas, market participants must follow the particular laws that each country has applied to the sale of gold and silver investments.


INNdepth

Want more details? Check out these articles for more INNdepth coverage.

Want an overview of investing in gold stocks? Check An Overview of Gold Stocks and Price.


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Securities Disclosure: I, Nicole Rashotte, currently hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Great Bear Resources is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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