Last Updated on January 12, 2023 by Ben
A lot of investors prefer to own physical gold and silver instead of exchange-traded funds (ETFs) that invest in these precious metals. The tax implications of owning and selling ETFs are clear. But many people do not know about the tax implications of owning and selling physical bullion. This article will help you understand how taxes work on your investments so that you can make a knowledgeable conclusion about what kind of assets you want to buy.
Table of Contents
- How Physical Gold is Taxed
- Tax Implications of Selling Physical Gold
- How Much Tax you Have to Pay When you Sell gold
- Reporting Requirements
- Cost Basis of Physical Gold
- Tax Example and Offset Possibilities
How Physical Gold is Taxed
Gold profits attract income tax. The rules on taxation depend on the form of gold redeemed. You can buy gold in many ways. You can buy physical gold by wearing jewelry, coins, or gold ETFs. You can also buy digital gold. It is a good idea to buy Sovereign gold bonds from the RBI as well.
There is a slight variation in the treatments of capital gains when you sell different kinds of gold.
Capital gains on selling physical gold will follow the same tax rules as that of debt funds. The short-term capital gains are taxed depending on your total income, with applicable taxes being levied under your elected tax slab. If the holding period for the precious physical metal is less than three years since the date of purchase, the gains are short-term.
If a gold investor holds the gold for more than three years, long-term capital gains will be taxed at 20% after indexation. Indexation is a process that considers the effects of inflation to determine the real value of invested capital.
Tax Implications of Selling Physical Gold
Physical holdings in precious metals are capital assets specifically classified as collectibles by the Internal Revenue Service.
Having investments in precious metals, regardless of whether they’re held as ETFs or as physical assets like bullion coins or bullion bars, are subject to capital gains tax. Capital gains tax is owed only after the sale of such holdings and if these holdings were kept for more than a year before being traded.
Not many people know the tax implications for precious physical metals, such as bullion and bars, versus other widely traded securities.
The capital gains tax on precious metals is equal to your marginal tax rate, up to a maximum of 28%. This means that people in the 33% or 39.6% bracket only have to pay 28% on their physical gold or silver sales. These individuals are taxed at ordinary income rates for short-term holdings.
How Much Tax you Have to Pay When you Sell gold
There are many ways to purchase gold to add in your portfolio.
Tax on Gains From Physical Gold Via Jewelry and Coins
Gold can be bought in three ways: jewelry, coins, or bars. The most common way is to buy it as jewelry and coins. This will shift how much you need to pay in taxes. If you sell the gold within three years of buying it, this is considered short-term.
The capital gains from short-term income will be included in your income, and then you will be taxed for the amount of tax that applies to your income. Long-term capital gains on gold sold after three years are taxed at 20% with indexation.
Tax on Gains From Gold ETFs, Gold Mutual Funds
Exchange-traded funds invest in physical gold and track the price of gold. Gold mutual funds, meanwhile, invest in other ETFs like investing (or not) in gold ETF. Gains from both types of investment are taxed the same as gains from owning physical gold.
Tax on Digital Gold
Digital gold is a new way to buy and save up for gold. Banks, wallets, and brokerages have joined with MMTC-PAMP or SafeGold to sell gold through their apps. Gains from digital gold are taxed just like physical gold or other types of investments in physical/mutual funds or ETFs.
Tax on Sovereign Gold Bonds
These are government bonds that can be converted to gold. They are substitutes for holding physical gold. These bonds are issued by RBI and come with a maturity period of eight years, with an exit option from the fifth year.
Sovereign Gold Bonds are the perfect way to secure your future financial stability and tax-free gains. When you redeem Sovereign Gold Bonds at the end of 5-8 years, any capital gain will be entirely free from taxes.
However, if you exit early via a secondary market sale, then capital gains tax may apply similarly to what is applicable for physical gold or gold mutual funds or ETFs. The gold bonds currently have 2.5% compounded interest per year; hence, the entire income generated from this bond is taxable depending on your tax slab.
Taxes are not due to the instant you sell precious metals. Instead, they should be reported on Schedule D of Form 1040, and taxes need to be paid at this time, too – depending on what metal is sold. If physical gold or silver was sold, then a form called “Form 1099-B” needs to be submitted as these sales go towards your income from that year.
If you trade precious metals, the tax liabilities are not due right away. Instead, sales must be reported with Form 1040 and Schedule D for income tax purposes.
Depending on what metal you are selling, Form 1099-B must be submitted to the IRS at the time of the sale. This is because sales of metals are considered income.
Items that require filing include $1,000 face value of ninety-percent silver dime or quarter/half dollars and 25 or more 1-ounce Gold Maple Leaf, Krugerrand, or Mexican Onza. Gold and silver bars that weigh 1 kilogram or 1,000 troy ounces need to be filed. American Gold Eagle coin sales do not need to be filed with Form 1099-B. You will have to pay taxes for all of these sales at the same time you pay your normal income taxes.
Cost Basis of Physical Gold
The amount of tax liability for the sale of precious metals will depend on the metal’s cost basis, which is equal to the price paid for those specific metals. The IRS does allow you to add some specific costs to this basis in order to reduce your tax liability on future sales. Certain items, such as appraisal costs, can be added as well.
To get the cost basis for articles under physical bullion, a taxpayer must use one of two separate methods.
If you receive a gift of gold or silver, the price is usually calculated based on the current market value. But if, at the time of gifting, the market value was less than what was originally paid for it, then the cost basis will be set to whatever that person had to pay for it when they bought it.
As for the second special scenario, if you inherit gold or silver, then your cost basis becomes the market value of that metal at the date of death.
- Gold IRA Contribution Guidelines
- How Gold Ira Works
- Will the Government Find Out I Am Buying Gold?
- Options for Storing Gold Safely
Tax Example and Offset Possibilities
For example, assume you buy 100 ounces of gold today at $1,330 per ounce. Two years later, you trade all of your gold holdings for $1,500 per ounce. You are in the 39.6% marginal tax bracket.
The following things might occur:
- Cost basis = (100ounces x $1,330) = $133,000
- Sale proceeds = (100ounces x $1,550) = $150,000
- Capital gains = $150,000 – $133,000 = $17,000
- Tax due = 28% (maximum rate) x $17,000 = $4,760
If you buy collectibles and they drop in value, you can use the money as a tax break. For example, if you sell gold at a loss of $500, then you can net these amounts and only owe $4,260. However, sometimes it is worth saving the $500 as a loss carryforward for future years so that you can use it to cancel gains on other investments.
Gold and silver are valuable because they have been around for a long time. They are good for people who want some money that will not be affected by the government or the market. They help people when times get hard.
Many investors choose to own physical gold or silver as opposed to the ETFs that invest in them. There are different forms of gain depending on how long you intend to hold your investment before selling, and gains are taxed accordingly.