muses of the moment

January 2, 2010

“Collectible” Taxes on gold

Filed under: Gold and Silver Investing, Precious metals, Taxes — totallygroovygirlfriday @ 4:04 pm

Let’s talk taxes.

First, never take any tax information at face value from anyone. Taxes are a very individual issue. What might be good advice for one person, may be horrible for another person’s circumstances. Not only is there disinformation floating around, the IRS is changing the tax code all the time.  Hire a tax attorney or accountant. It is worth the trouble and money.

Yes, physical gold and silver and gold and silver exchanged-traded funds (ETFs) are all taxed (long-term) at the “collectible” tax rate of 28%. Yes, it is high. But if you are buying gold and silver now and not selling until it is at $5,000, then your investment will beat any other even with the high tax rate.

As with any investment, you must consider the face value, the tax when buying or selling, any fees, and the devalue of the currency you are working with. And of course, the parameters of time, when you are buying and when you selling. Then you can make an informed decision about an investment.

For instance, let’s say you buy an ounce of physical gold at $500. You hold it for 10 years and sell at $3,500, that’s a gain of 600%. (This sale is under the $10,000 reporting limit, so the purchaser is not required to report the transaction to the IRS. The seller is responsible for that.)

Your capital gain is $3,000. 28% of $3,000 is $840. Your real gain is now $2,160 or 332%.  This percent of gain over 10 years is 33.2% average per year. Even with the huge tax added in, this return per year is very good.

This is called investing in long-term bull markets. Stocks had their run in the 1990’s, now it is the turn for precious metals and commodities. Click here for a chart from chartoftheday.com. (Note: this is not a chart adjusted for inflation. Inflation would make the 70’s, 80’s, and 90’s less than shown and this last decade much worse.) It shows that there are bull markets and bear market decades for stocks. Your gain on investment depends alot on when you are in the market.

If you hold a gold ETF for less than a year, it is taxed at the 15% rate. You can see that ETFs are set up for short-term volatile trading. Besides the fact that I think it is completely unfair to tax long-term holding of ETFs at 28% when they are not a dollar for dollar holding of physical gold. It’s a derivative of the physical gold. Yet another reason not to invest in precious metal ETFs. Coins are for long-term, ETFs are for less than a year, if that.

IRAs will let you hold the gold ETFs long-term, but only tax you the 15% at sell. Although this looks good at first, there are some concerns. They can change the rules at anytime. The IRA will charge you to “manage” or otherwise have that investment in your IRA. Thus more added fees which may eat through any 10% in taxes you might have saved.

It is very possible that the IRS will raise the “collectible” tax rate. If they do, it will be a time to rework the formula to see if it is still an advantage to have physical gold over an ETF or other investment. However, physical gold and silver is still insurance for the coming currency collapse. This is a different viewpoint than an investment with an expected return. In this post, I am presenting gold and silver as an investment. In other posts I have presented physical gold and silver as a place (and possibility the only place) to preserve the purchasing power of your savings.

Gold and silver stocks will always be at the capital gains rate. But do your due diligence. A gold mining stock is not the same investment as a gold coin. There are risks and rewards to each investment.

Please take all these things into consideration for your personal investing needs and hire a tax accountant. Groovygirl is not suggesting that you should buy precious metals. The purpose of this post is to show you some of the things that you need to consider before you engage in a long-term investment (of any kind). There will be a time when it is time to sell gold (or some gold) and buy another investment when this bull market is coming to an end.

Any comments or suggestions by readers are greatly appreciated.

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