- 31 Dec 2022
- Precious Metals
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Investing in precious metals such as gold or silver can significantly diversify your portfolio and protect your wealth. However, you may be subject to capital gains tax if you sell your precious metals. Fortunately, there are ways to avoid or minimize your capital gains tax liability on precious metals.
To reduce the capital gains tax, you must pay when selling your precious metals, take advantage of any applicable tax exemptions and investigate potential investment opportunities. It is important to plan ahead to maximize the tax advantages of investing in precious metals.
In this article, we'll discuss the value of precious metals, how to determine what you gain when selling your precious metals and the various ways you can invest in precious metals. We'll also discuss taking advantage of tax exemptions and strategies to help you avoid or minimize your capital gains tax liability when selling your precious metals.
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What Are Precious Metals?
Precious metal is a term used to describe physical assets such as gold, silver, platinum and palladium. Precious metals are usually in the form of bars, ingots or coins.
Precious metals are traditionally used as a store of value, although you can use them as an investment in just about any investment vehicle. For example, a precious metals IRA has long been one of the most popular investments for retirement portfolios due to its stability and liquidity.
Gold has historically been considered a safe investment for many reasons. Most importantly, gold is rare and thus valuable. It is also in limited supply, making it valuable for long-term investors. In addition, gold is often highly portable and used as a barter currency. As a result of gold's use as money throughout history, some consider it to be the future of money.
Why the Popularity of Gold IRA?
Gold IRAs are becoming increasingly common, and for a good reason. First, a precious metals IRA allows you to store gold and silver in bullion (gold bars or rounds) or coins. Physical assets can provide valuable diversity when added to a portfolio that otherwise consists solely of paper assets like stocks or bonds.
A second reason to invest in gold and silver is that they have always been a haven against inflation. Gold and silver have retained their value over time and are as good a store of value as any currency. In periods of high inflation, currency can lose its purchasing power. In contrast, precious metals are immune to inflation.
Additionally, IRA investors receive significant tax benefits, making this a superb vehicle for reducing overall tax exposure on retirement savings. Through a Gold IRA, an investor can invest in gold, pay no capital gains tax and defer paying taxes on interest and dividends.
A final reason to have a Gold IRA is the ease of diversification. Individual investors can put 1-100% in precious metals and keep their account within the regular IRA guidelines set forth by the IRS. Investors can allocate their investment dollars based on the risk they are willing to take.
What Is Capital Gains Tax?
Capital Gains Tax is a tax on the profits (or gains) that arise when a capital asset, such as a stock, bond or real estate, is sold for more than its purchase price. Capital Gains Tax is an essential source of revenue for governments, providing them with a way to raise funds from individuals and corporations who have profited from their investments in capital assets.
When a capital asset is sold, the difference between the sale price and the purchase price is considered a capital gain. This capital gain is taxed at the applicable rate, usually lower than the rate applied to income. The tax rate applied to capital gains can vary depending on the type of asset, the length of time the asset was held before it was sold and the jurisdiction in which the asset was bought and sold.
In some cases, certain capital gains may be exempt from taxation or the tax rate may be reduced. Understanding the rules and regulations regarding Capital Gains Tax is vital in managing investments, as it can affect the overall return on investment.
Defining Capital Gains Tax on Precious Metals
Capital Gains Tax on precious metals is the tax that must be paid to the government when a person or entity sells a precious metal asset, such as gold, silver or platinum, for a profit. The tax rate applied can vary depending on the type of asset sold and the amount of gain realized.
For example, a gold coin purchased for $1,000 and sold for $2,000 would incur long-term or short-term capital gains taxation, depending on the seller's holding period. The tax rate on capital gains held for more than a year is often lower than the rate on profits held for less than a year.
In the United States, long-term capital gains tax rates range from 0% to 20%, with higher-income earners paying the highest rate. Additionally, some states may also impose state-level taxes on the gain realized. It's important to consult with a qualified tax professional to ensure that you understand the tax implications of any transaction involving precious metals.
Taxation on Gold and Other Precious Metal Investments
Many American investors are caught off guard by the high tax rates that apply to selling real gold and other precious metals like silver, platinum and palladium. For this reason, gold and other precious metals are taxed at the same 28% long-term capital gains rate as "collectibles" by the U.S. Internal Revenue Service (IRS). Long-term capital gains rates of 15% or 20% apply to profits made on most other assets held for longer than a year.
The Tax Rate on Collectibles Is 28%.
The same 28% tax rate applies to gold coins and bars as it does to most ETFs. Many people have difficulty maintaining ownership of these investments, even financial counselors. They wrongly conclude that because the gold ETF trades like a stock, they will be taxed at the same long-term capital gains rate of 15% or 20% as applies to stocks.
The high expenses of holding gold are commonly attributed to dealers' markups and storage fees for physical gold or the management and trading fees charged by gold ETFs. Gold and other precious metals may incur a hefty cost due to taxation.
The good news is that there's a simple technique to reduce the tax hit from owning gold and other precious metals.
Gold Investments Through PFICs Offer Favorable Tax Treatment of 15% or 20%
U.S. citizens benefit from lower tax rates while investing in Sprott Physical Bullion Trusts than similar exchange-traded funds (ETFs). U.S. non-corporate investors can take advantage of long-term capital gains tax rates upon the sale or redemption of their units since the trusts are considered Passive Foreign Investment Companies (PFIC) and are domiciled in Canada. Units held for more than a year at the time of sale are subject to a 15% or 20% tax rate, depending on income.
To qualify, investors (or their financial advisers) must complete IRS Form 8621 and attach it to their federal income tax return to designate each trust as a Qualified Electing Fund (QEF).
While making the annual decision to own gold through one of the Sprott Physical Bullion Trusts might result in considerable tax savings, no investor enjoys the process.
Strategies to Avoid Capital Gains Tax on Gold and Other Precious Metals
There are several tax strategies you might employ if you profit from gold investing. Further, there exist methods to reduce capital gains taxes generally. Here, I will explain the three most frequent approaches investors take to reduce their taxes on gold-related capital gains.
You may reduce your capital gains taxes on gold and other precious metals by using one of three standard strategies.
1. Avoiding Physical Assets
Although many gold investment options are available, gold bullion is the most common form of direct gold investment. This indicates that you have actual gold.
Alternatively, you may put your money into instruments that will buy bullion on your behalf. You may invest in actual gold by purchasing an exchange-traded fund. In this scenario, you will be a de facto owner of gold bullion. You may end up with a much higher tax burden due to this. It very likely will.
Generally, three tax rates apply to capital gains: 0%, 15% and 20%. Investment gains are subject to a maximum tax rate of 20%; to be in the highest tax bracket, a single filer would need to earn $450,000 or a married couple would need to make $500,000 to qualify.
In contrast, the IRS classifies metal in large amounts as a "collectible." The normal tax rate on coins, artwork and bullion is 28%. Therefore, the maximum capital gains tax rate is 28% if you hold actual gold or ETFs that own physical gold.
To avoid this, it is advisable to put your money into funds and assets that do not directly purchase gold. A helpful strategy is to look for exchange-traded funds (ETFs) and mutual funds (MFs) that explicitly use this strategy. The Internal Revenue Service taxes investments in futures contracts and options at the maximum conventional capital gains rate of 20% since they are not considered physical assets.
2. Holding Your Investments For At Least One Year
This is a piece of legal advice on capital gains tax for all your assets. To the IRS, a capital gain is considered short-term if it is realized on the sale of an asset within the first year of purchase. Profits from these do not qualify for reduced capital gains tax levels since they are taxed alongside ordinary income.
To avoid this, you should sell your shares after waiting at least a year. If you don't, your income tax rate can go up. For anyone making above $523,601 as a single taxpayer in 2022, the maximum tax rate is 37%. The maximum rate is applied to a joint taxpayer's income if it has reached $628,301.
3. Consider A 1031 Exchange
The capital gains tax can be deferred indefinitely through a 1031 exchange if the proceeds are reinvested in another investment property.
Typically, this replacement investment must be made 45 days after the sale of the initial investment. In the case of selling gold, for example, the proceeds would have to be reinvested in precious metals due to the need for a similar investment. Since the capital gains are taxed the moment they enter your bank account, an intermediary is required to keep the funds.
The basic premise is that you may transfer the value of one investment into another without incurring any tax liability. Investors who plan to reinvest their gains from gold may find this information helpful. However, this approach will only help if you quickly convert your gold into cash.
Top Precious Metal Companies to Help You with Tax Planning for Precious Metal Investments
We understand that tax planning is important when investing in precious metals. The ability to afford tax planning is limited for many investors. While some companies can help, we have taken it upon ourselves to introduce the top five companies that help gold investors with their tax planning concerns.
Goldco is one of the leading companies in the precious metal industry, offering various services to help people with tax planning for gold investments. Goldco provides multiple products and services to help investors protect their wealth and minimize tax liabilities.
As a full-service precious metals company, Goldco offers competitive pricing on gold bullion coins and bars, as well as a variety of other investment options such as gold and silver IRAs, rare coins and numismatic collectibles. The company also provides advice and assistance from experienced professionals who can help design and implement an effective tax strategy for gold investments.
Goldco's experienced financial advisors are knowledgeable in gold investing and can guide how to best use gold to support your long-term financial objectives. Goldco also offers secure storage services to help protect your assets and ensure they remain safe and accessible.
With their comprehensive services and expertise, Goldco is an excellent choice for those looking for a reliable source for tax planning for gold investments.
Augusta Precious Metals is a gold, silver and platinum bullion coin, bar and numismatic products company with locations worldwide. Being a family-owned company has allowed them to maintain a personal level of service that truly works for each client. By listening to the needs of their clients and staying in touch with their markets, they ensure that they can supply the highest quality commodities at a fair price.
In addition, they offer excellent service through coin storage services and various other services. A genuine passion for the precious metals industry keeps them strong and delivers the highest quality product at a great price. Augusta Precious Metals is an excellent choice to check out if you are looking for a gold and silver tax planning company.
Having been in the gold business for many years, American Hartford Gold has a wide breadth of experience in the gold industry. Their expertise allows them to invest large sums of their client's money into gold and other commodities, so they can make it easier to pay taxes on their investments.
They can offer tax-deferred products and fully vested physical metal, meaning you get your entire tax refund when you redeem it. This ensures that your investment is as effective as possible. In addition, their financial advisors ensure that your investment plan is optimized and optimally serves you.
Using this approach, they can help you get the most out of every purchase. American Hartford Gold is an incredible company for tax planning for gold investments.
#4. Birch Gold Group
Birch Gold Group is one of the most credible companies in the world of gold. Their expertise in the precious metals industry means they can provide gold investors with access to products and services that many other companies can't offer. In addition to selling precious metals through their storefronts, Birch Gold Group provides practical advice on tax planning for gold investments.
Using their experience, they can provide valuable insight into how you can use precious metals as an investment to make the most of your money and reduce your tax burden. Their financial advisors are also known to be one of the most knowledgeable in the industry and can help maximize every penny you invest.
With their wide array of services, including storage options, expertise in precious metals and access to precious metals market prices, Birch Gold Group is an excellent choice if you are looking for a reliable source for tax planning for gold investments.
#5. Noble Gold
Noble gold is a company that takes pride in its ability to create quality products from gold and other precious metals, and they do this by offering a diverse group of products to customers. This includes storage, investments, special services for collectors and estate planning, among many others.
The company is well known for offering the best value for its customers and ensuring that the products they sell are of the highest quality. They are also known for providing a wide range of impressive services, including financial planning with tax optimization as one of their core strengths.
The IRS treats gold the same way as any other investment asset for calculating capital gains tax. In contrast, the tax rate on gold is higher at 28 percent since it is considered collectible. If you can, you should avoid investing in physical metal to limit your capital gains tax to the more manageable ordinary long-term capital gains rate. Additionally, to avoid paying even more in taxes, you should wait at least a year before selling any gold investments.