Categorized | Investing in Gold

Tax Implications of Investing in Gold - Part 1


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A quick search on the internet will reveal a lot of conflicting information regarding the tax rules for selling precious metals, and for good reason. Nobody likes to think about taxes, after all, but they are absolutely an important factor when choosing the right investments. Depending on why you are investing in gold and your levels other income, the various tax rules may steer you towards particular purchasing and holding methods in order to get the highest returns.

In part one of this article series, we will give a brief overview of capital gains taxes and also talk about what we think is the most overlooked (but critically important) piece of information on the subject.

Taxes are an extremely individual issue, and much more complicated than can be fully covered in one article (or article series). As you’re no doubt aware, there are lots of rules and the IRS changes them on a regular basis. We are not tax advisers or tax lawyers. You should consult these sorts of professionals to discuss your individual situation before acting. It’s worth it - they will save you time and money.

What Are Capital Gains Taxes

The capital gains tax is a tax levied on any gains made when you sell investments. For example, If you bought stocks for $1,000 and later sold them for $1,500, you would be taxed on the $500 in gains made on the sale. This tax applies to a broad range of investments, including securities, real estate, and metals such as gold. In short, you are taxed on the profits you make when investing.

The tax rate on capital gains depends on a couple of factors. The first and most common is the duration you held the asset. Capital gains are split between short-term gains and long-term gains. If you sell an investment before a year has passed, you are taxed at the short-term rate. If you hold the investment for at least a year, you are taxed at the lower long-term rate.

The second, and less often quoted major factor in capital gains taxes is the type of investment. You will typically hear cited a tax rate of 15% when people are discussing capital gains. This is the long-term capital gains rates for securities. These are your stocks, bonds, and mutual funds - by far the most common investments. But not every investment qualifies for this low rate. Investment real estate has a capital gains rate of 25%. Metals (including gold and silver), unfortunately, are lumped in with art, wine, and a variety of other items as “collectibles”, which are taxed at a 28% rate.

Capital Gains Taxes Are Cited As A Maximum Rate

This is one point I rarely see brought up, which is unfortunate because it is very important when determining the actual tax rates of your investments. The capital gains tax rates you see quoted, including all of the rates I cited above, are maximum rates. What this means is that the gains are taxed at the same rate as your normal income, up to the maximum rate specified. So if your total income, including the capital gains, leaves you taxed at a lower rate than the maximum, you will not be taxed at the typically cited rate. For the 15% long-term capital gains rate for securities this doesn’t come up very often, but for gold and the collectible rate of 28% it can have a substantial effect.

This is best demonstrated by example:

In 2012 the 28% tax bracket starts at $85,650 ($142,700 for married filing jointly). Let’s say you’re married filing jointly. If your ordinary income is $50,000 and your capital gains from selling gold are an additional $20,000, putting your total income at $70,000, your gains will only be taxed at 15% - exactly the same as the rest of your income. If, however, your ordinary income was $50,000 and your capital gains from selling gold are an additional $150,000, you’d pay taxes at a higher rate, like this:

  • 15% for the gains between $50,000 (your ordinary income) and $70,700 (the top of the 15% tax bracket);
  • 25% for the gains between $70,700 and $142,700 (the top of the 25% tax bracket); and
  • 28% for the gains between $142,700 and $200,000 (your total income)

Had your gains come from long-term stocks instead of gold, all of your capital gains would have been taxed at the 15% rate since that is the maximum for that investment class. So you can see that the capital gains tax for gold isn’t necessarily 28% - it depends on your total income.

That’s it for part one. In part two (not released yet!) we’ll cover the various forms of gold buying and the rate they are taxed at.

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