All Things Financial Planning Blog

And Maybe Some Tax Surprises Too

I’m sure you’ve seen or heard a ton of commercials lately on radio, TV, newspapers and the Internet touting the benefits of buying gold.  As a financial planner, I receive a steady stream of e-mails from every mutual fund, exchange-traded fund (ETF), insurance or other investment product company you can imagine. A lot of these are ignored or become so much white noise. Recently, one e-mail in particular broke through the noise. This e-mail talked about gold but referenced a November 16 article in Barron’s, a weekly financial newspaper.  The article, written by Bob Carlson, focused on the tax aspect of investing in gold and other precious metals.

Here’s the deal. The Internal Revenue Service (IRS) views investments in gold and silver, at least when in taxable accounts vs. tax-deferred accounts such as IRAs (individual retirement accounts), as collectibles. In tax-deferred accounts such as IRAs, such investments are not viewed as collectibles.

OK, so what’s the big deal?  Well because the IRS includes gold in this category, gains are not subject to the maximum 15 percent long-term capital gains that pertain to most other investments. Instead, profits are taxed at a rate as high as 28 percent when held for more than a year. Profits on positions held less than a year are taxed at ordinary income tax rates.

As if that weren’t bad enough, the structure of some precious metal investments may pass along a nasty tax surprise whether you sell your position at a gain or not. The structure of many ETFs is that of a grantor trust. This means two things primarily from a tax standpoint. The first is that when you sell shares in an ETF you are deemed to have sold a fractional share of the underlying gold held by the fund thus resulting in the maximum 28 percent tax liability. The second thing is that when the ETF itself sells the physical gold gains are passed along to you. You then face the prospects of a maximum 28 percent tax liability even if you did not realize any gain. Why would this happen?  The ETF may sell the gold to pay expenses. In this scenario, you as an investor do not realize any gain but the tax liability is passed along to you.

There are many ways to gain exposure to gold in a portfolio. ETFs aren’t the only game in town.  Frankly, all ETFs are not deemed to be collectibles. The vast array of investment options include ETNs (exchange-traded notes), certain gold coins and even stock in mining companies. From a practical standpoint I advocate some exposure to gold (amongst other commodities and natural resources) in client portfolios.  However, this is a time to exercise some additional caution on the subject.  If you think that having exposure to gold is a good thing, that’s great.  Just be sure that you take the time to understand the tax considerations before you jump in.

Lee Baker, CFP®
President
Apex Financial Services
Tucker, GA