How Taxes Work For Gold ETF & ETP Investments
This article was originally published on ETFTrends.com.
Gold remains one of the more popular commodity exchange-traded products (ETPs). The asset class has found renewed interest recently, as gold prices near record highs. But before diving into a gold ETF or ETP, investors should understand how taxes work in these vehicles.
Why Taxes On A Gold ETF Matter
The general notion is that investors should only worry about taxes if they sell their ETPs for a gain. In essence: "I didn't sell it, so I don't need to worry about it."
But that's not the case with commodity ETPs -- and gold ETPs in particular.
Read more: "Recession Fears Strengthen Need For Gold Exposure"
Typically, when an investor sells ETP shares, a 1099 is necessary to report gains or losses. What's reported depends on whether the gains were long-term (assets held beyond one year) or short-term (assets held less than one year), as well as the tax bracket the investor falls within (shown below).
2023 LONG-TERM CAPITAL GAINS:
FILING STATUS | 0% RATE | 15% RATE | 20% RATE |
|---|---|---|---|
Single | Up to $44,625 | $44,626 – $492,300 | Over $492,300 |
Married filing jointly | Up to $89,250 | $89,251 – $553,850 | Over $553,850 |
Married filing separately | Up to $44,625 | $44,626 – $276,900 | Over $276,900 |
Head of household | Up to $59,750 | $59,751 – $523,050 | Over $523,050 |
2023 SHORT-TERM CAPITAL GAINS:
Tax rate | Single | Head of household | Married filing jointly or qualifying widow | Married filing separately |
|---|---|---|---|---|
10% | $0 to $11,000 | $0 to $15,700 | $0 to $22,000 | $0 to $11,000 |
12% | $11,001 to $44,725 | $15,701 to $59,850 | $22,001 to $89,450 | $11,001 to $44,725 |
22% | $44,726 to $95,375 | $59,851 to $95,350 | $89,451 to $190,750 | $44,726 to $95,375 |
24% | $95,376 to $182,100 | $95,351 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 |
32% | $182,101 to $231,250 | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 |
35% | $231,251 to $578,125 | $231,251 to $578,100 | $462,501 to $693,750 | $231,251 to $346,875 |
37% | $578,126 or more | $578,101 or more | $693,751 or more | $346,876 or more |
However, taxes for a gold ETF and ETP are more nuanced. In fact, an ETP's structure determines how it's taxed, particularly at sale.
Taxes On A Futures-Based Gold ETF
To get simple exposure to the price fluctuations of gold, exchange-traded funds (ETFs) can invest in gold futures contracts. This allows the investors to get the diversification of gold via its price changes without the hassle of storing the actual gold itself. (However, because futures are involved, volatility could be higher.)
Commodity-based ETFs that own futures contracts are structured like a partnership (a business entity with more than one owner). As such, investors don't simply report the gains made when they sell the shares but must account for the gains yearly based on 60% long-term (holding assets beyond a year) and 40% short-term (holding assets less than a year) gains. This is also known as a hybrid rate.
Gains or losses in futures-based ETFs are reported on a K-1 form, which is issued annually. As such, a 1099 form is unnecessary when shares are sold in the short or long term.
Examples of ETFs investing in gold futures:
Taxes For Physically Backed Gold ETFs
ETFs that hold physically backed gold afford the benefits of exposure to the precious metal without actually having to store the gold itself, which offers convenience to the investor. Instead, this gold is typically held in a vault. Sometimes, investors may even have the option to exchange their shares for the actual underlying physical gold.
The discerning feature of ETFs backed by physical gold is that the IRS treats them as collectibles with their own special tax treatment. Given this nuance, long-term capital gains can be up to 28% for the top tax bracket instead of 20%.
Once again, taxation will depend on the structure of the ETF. Those structured as a grantor trust are subject to this 28% long-term capital gains tax. Meanwhile, the aforementioned gold ETFs that invest in futures contracts will be taxed at a top rate of 20% because they're a partnership rather than a trust.
"In your mind, you think, 'I'm just buying a stock,'" said Troy Lewis, associate professor of accounting and tax at Brigham Young University, in a CNBC report. "But the IRS has taken the position they're actually collectibles because they're backed by bullion."
Examples of ETFs backed by physical gold:
Taxes For Gold-Based ETNs
Lastly, gold-based exchange-traded notes (ETNs) also track gold prices, but don't require a K-1 form associated with commodity-based ETFs that invest in futures contracts. Instead, they use the common 1099 form when shares of the ETN are sold. Typical short- and long-term capital gains tax rates apply.
Example of a gold ETN:
In the end, always consult a tax professional to determine the tax ramifications associated with gold ETPs.
For more news, information, and analysis, visit the Gold/Silver/Critical Minerals Channel.
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