personal finance

Gold, Silver ETF Owners Face 28% Top Tax Rate on Profits. That's Higher Than Levies on Stocks

Oliver Strewe | The Image Bank | Getty Images
  • Exchange-traded funds backed by precious metals like gold and silver are treated as collectibles for tax purposes, according to accountants.
  • That means they carry a 28% top federal tax rate on long-term capital gains. Stocks, bonds and other investments generally have a 20% top rate on profits.
  • However, there are a few caveats.

Investors who sell gold, silver and other precious-metal exchange-traded funds may find their profits taxed at a higher rate than other holdings like stocks and bonds.

The IRS treats ETFs backed by physical precious metals as collectibles for tax purposes, according to accountants.

Collectibles — like art, antiques and coins — carry a 28% top federal tax rate on long-term capital gains. (This is the tax rate on profits for an investment sold after at least a year of ownership.)

Conversely, stocks, bonds and many other investments have a 20% top tax rate on long-term profits.

This dichotomy in tax rates may catch investors by surprise, leading to lower-than-expected net profits after tax. The war in Ukraine has pushed more investors into gold, which some see as a "safe haven" in volatile times, and fueled a price rally.  

"In your mind you think, 'I'm just buying a stock,'" said Troy Lewis, an associate professor of accounting and tax at Brigham Young University. "But the IRS has taken the position they're actually collectibles because they're backed by bullion."

The IRS didn't respond to a request for comment.

When ETFs are physically backed by gold, silver, platinum, palladium or other precious metals, each ETF share represents ownership in the underlying metal.

Examples include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and Aberdeen Standard Gold ETF Trust (SGOL) and the iShares Silver Trust (SLV). Each is up almost 7% or more since the beginning of the year.

Selling a share is treated as having sold the metal itself, said Lewis, who owns an accounting firm in Draper, Utah. And because the IRS classifies metal coins as collectibles, ETF investors face the top 28% tax rate that applies to all collectibles when they sell shares.

The IRS outlined this thinking in a 2008 memo. (While the memo doesn't carry the weight of official law, accountants have largely accepted its rationale, Lewis said.)

Caveats

Chris Ratcliffe/Bloomberg

There are some important caveats for investors, though.

For one, not all ETFs linked to a precious metal are physically backed by that metal. For example, some hold futures and options contracts instead, according to Dave Nadig, research director at ETF Trends.

The collectibles capital-gains tax rate also only applies to ETFs structured as trusts.

ETFs that aren't structured as a trust or don't directly invest in a metal aren't subject to the top 28% capital-gains tax rate for collectibles, according to the IRS memo.

More from Personal Finance:
Cash-rich states create 'competitive environment' with flurry of tax cuts
How the Fed's expected rate hike will impact your wallet
Here are 5 tips for young investors

(The major gold and silver ETFs, including the ones listed above, are structured as trusts, according to Todd Rosenbluth, head of ETF and mutual fund research at CFRA.)

The capital-gains tax issue applies to investors who buy an ETF in a taxable brokerage account. But holding a precious-metal ETF in an individual retirement account sidesteps the issue.

(Roth IRA investors pay income tax up front on a purchase, but all future growth is tax-free; investors with a pre-tax IRA pay their regular income tax rates when they withdraw money in retirement.)

Long-term capital gains taxes on collectibles work differently than those of stocks, bonds and other investments.

Stock investors generally pay one of three tax rates on their profits — 0%, 15% and 20%, the top rate — based on their income. These rates are preferential with respect to an investor's regular income tax rates, of which there are seven (10%, 12%, 22%, 24%, 32%, 35% and 37%).

Conversely, the capital-gains tax rate on collectibles aligns with these seven rates, up to a 28% maximum. That means an investor whose annual income puts them in the 12% tax bracket would pay a 12% tax rate on their collectibles profits; an investor in the 37% bracket would be capped at 28% on their collectibles profits.

All affluent investors (whether stocks or collectibles) pay an additional 3.8% Medicare surtax.

Copyright CNBCs - CNBC
Contact Us