Monday, November 16, 2009

Barron's on gold tax treatmeent

INVESTORS HAVE BEEN POURING MONEY into exchange-traded funds that buy gold and silver, and that has helped push the price of gold to a recent high of $1,123 an ounce. But fans of those ETFs might not realize that the tax consequences of their investments could be costly.

Gold and silver receive special treatment in the tax code. Considered collectibles, not capital assets, they don't qualify for the maximum 15% tax rate on long-term capital gains. Instead, gains on the sale of gold and silver investments, including gold- and silver-backed ETFs, and gold bullion and coins (except certain U.S.-issued coins), are taxed at a maximum rate of 28% when such investments have been held for more than a year. When these assets are held for less than one year, gains are taxed as ordinary income.

PRECIOUS-METALS ETFS are organized as grantor trusts. Investors in an ETF are treated as owning undivided interests in the metal owned by the fund. When an investor sells shares in the ETF, the tax code treats that investor as having sold a share of the metal backing the fund. Thus, the investor is subject to the maximum tax on collectibles.

If the ETF sells some of its gold or silver, as funds typically do to pay expenses, including management fees, then gains or losses on such sales flow through to the fund's investors, though they receive no cash distribution. In the case of gains, the investors must include their share of the profit in gross income, which likewise would be taxable at the maximum 28% rate.

Why wouldn't you then own the physical gold?? Do you think you will get a 1099 from your neighboring coin dealer?

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