I have a small allocation of my holdings in GLD. It’s an ETF that owns gold bullion. Each share is valued at 1/10 of an ounce of the Gold spot price. It has performed extremely well over the last 3 years that I have held a position in my portfolio.
Gold is often considered a haven in times of crisis. It’s price typically moves in the opposite direction of the dollar. It certainly provides diversification in a stock portfolio.
However, it also tends to attract emotionally driven and speculative investors who can add to its inherent volatility. In addition, it has much less practical use as other precious metals like copper and silver, making it conducive to even more speculation. Consequently, as gold has been reaching all time highs as of late, I have decided to set a target sell price. I plan to sell the ETF when it reaches that target.
Even though I will net a large gain in the sale, I have actually been dreading that sell date. Because, the ETF owns gold, it is considered to be a collectible and is taxed at nearly twice the rate of capital gains. Therefore, I will have to report it as gains from the sale of collectibles and pay a rate of 28% on those gains. There is no way around this – even though some have suggested reporting it as a stock trade and paying only the 15% rate. That's a good try, but when I make the sale, my broker will supply the IRS with that record, so trying to get around this would not be worth the risk.
It’s interesting that if I had sold the shares after holding for less than one year, I would get a lower tax rate. The short-term capital gains rate for gold or silver ETF shares is the same as for other investments: your ordinary income tax rate. The IRS is essentially encouraging short term trading of gold!
Yes, I know it’s a good problem to have. It was a successful investment. Unfortunately, not only do I not want to sell, but because of the extreme tax rate, I do not plan to buy any more shares of GLD. This 28% tax is so onerous that it actually stifles business transactions.
Instead of purchasing gold in the future, I plan to add to my holdings in gold mining stocks, which are taxed like any other stocks.
Now, before I completely eliminate the possibility of ever having gold bullion in my portfolio there is one other way that I could possible buy gold again. This may be surprising to some…..
Even though the IRS considers gold to be a collectible and collectibles are not allowed in an IRA, the IRS has made an exception. As of August 10, 2007, the IRS privately ruled that:
Shares of ETFs in the form of a trust that mirror the price of physical gold and silver do not constitute an acquisition of a collectible if they are acquired in an IRA.
The IRS has created yet another double standard. As a result, a gold ETF in an IRA will not be subject to the 28% long-term tax rate on collectibles. So there’s no reason (at least at this time) to worry about avoiding the collectibles tax rate when holding gold or silver ETF shares in an IRA.
Gold is often considered a haven in times of crisis. It’s price typically moves in the opposite direction of the dollar. It certainly provides diversification in a stock portfolio.
However, it also tends to attract emotionally driven and speculative investors who can add to its inherent volatility. In addition, it has much less practical use as other precious metals like copper and silver, making it conducive to even more speculation. Consequently, as gold has been reaching all time highs as of late, I have decided to set a target sell price. I plan to sell the ETF when it reaches that target.
Even though I will net a large gain in the sale, I have actually been dreading that sell date. Because, the ETF owns gold, it is considered to be a collectible and is taxed at nearly twice the rate of capital gains. Therefore, I will have to report it as gains from the sale of collectibles and pay a rate of 28% on those gains. There is no way around this – even though some have suggested reporting it as a stock trade and paying only the 15% rate. That's a good try, but when I make the sale, my broker will supply the IRS with that record, so trying to get around this would not be worth the risk.
It’s interesting that if I had sold the shares after holding for less than one year, I would get a lower tax rate. The short-term capital gains rate for gold or silver ETF shares is the same as for other investments: your ordinary income tax rate. The IRS is essentially encouraging short term trading of gold!
Yes, I know it’s a good problem to have. It was a successful investment. Unfortunately, not only do I not want to sell, but because of the extreme tax rate, I do not plan to buy any more shares of GLD. This 28% tax is so onerous that it actually stifles business transactions.
Instead of purchasing gold in the future, I plan to add to my holdings in gold mining stocks, which are taxed like any other stocks.
Now, before I completely eliminate the possibility of ever having gold bullion in my portfolio there is one other way that I could possible buy gold again. This may be surprising to some…..
Even though the IRS considers gold to be a collectible and collectibles are not allowed in an IRA, the IRS has made an exception. As of August 10, 2007, the IRS privately ruled that:
Shares of ETFs in the form of a trust that mirror the price of physical gold and silver do not constitute an acquisition of a collectible if they are acquired in an IRA.
The IRS has created yet another double standard. As a result, a gold ETF in an IRA will not be subject to the 28% long-term tax rate on collectibles. So there’s no reason (at least at this time) to worry about avoiding the collectibles tax rate when holding gold or silver ETF shares in an IRA.
I'm one of those investors that don't know what I'm doing and make the stock volatile. Nice to meet ya! :)
ReplyDeleteI just found out about the 28 percent tax rate and I'm trying to figure out what to do with my GLD holding. I'm thinking of selling it off before my year is up, but I'm so confused as to when that year will actually be up. Any advice? I just wrote a post on this topic in my blog www.hereverycentcounts.com
Nice to meet you, too. Thanks for the question.
ReplyDeleteI read your post. The start of the one year for short term cap gains begins at the time of purchase. Each time you buy a share or shares, a purchase date is associated with that transaction. Since you are using sharebuilder, you will have some shares that are older than others, so to speak.
The short term gap gains rate is the same as your income tax rate, which is probably less than 28%.
Hang in there. IMO, GLD is just getting warmed up and I plan to post more about it in the coming weeks.
A better option is CEF - which is a bullion holding company (both gold and silver) called Central Fund of Canada. They are taxed as NORMAL captial gains rates.
ReplyDeleteTurns out they have more transparency and better auditing of their bullion than the ETF's as well.
Thanks for the info about CEF. I have never invested in a closed end fund and am concerned about paying a premium to do so.
ReplyDeleteAlso if you sell off your ETF to avoid the collectible tax rate - watch out for the wash sale rules if you want to get back into it soon after. Honestly, I'm not very familiar with the nuts and bolts, but it will probably confuse things.
ReplyDeletewell how about slv options like buying calls?
ReplyDeleteI've been long on slv calls since 2009 and am woundering what the tax rate would be?
It’s price typically moves in the opposite direction of the dollar. It certainly provides diversification in a stock portfolio. holding gold in an ira
ReplyDelete