The Taxation of Gold

Gold has unique attributes that make it attractive as an investment to many of our clients in these turbulent times and, like all investments, there will be tax ramifications to investing in gold.

Once you have determined that gold should be part of your overall investment strategy the next step is to determine what form you want to own: coins, bullion, shares of gold mining companies or exchange traded funds (ETFs). This article will look at the taxes associated with the different ways of owning gold.

Federal and State Income Taxes

Shares of stock in gold mining companies, under the Internal Revenue Code (IRC), are intangible assets and are taxed as either short-term or long-term capital assets depending on the holding period. For stocks held for more than one year the federal long-term capital gains rate is 15% in 2010, and it is scheduled to increase to 20% in 2011. The short-term capital gain rates are the same as the ordinary rates with the maximum rate at 35% in 2010, and the rate is scheduled to increase to 39.6% in 2011. For state purposes, the gain from the sale of the shares is allocated to the investor's state of residency and subject to tax in his or her home state.

Gold coins and bullion are tangible personal property under the IRC and are taxed as a collectible. Collectibles are taxed as capital gains or losses similar to stocks and bonds but with one very important exception. Collectible long-term capital gains, such as the sale of physical investment in gold, are taxed at 28% rather than 15%. However, most states do not differentiate between ordinary income and capital gains and thus apply a uniform rate to both forms of income. In states that do distinguish between ordinary income and capital gains it is important to confirm whether the state adopts or decouples from the relevant federal provisions. Further, since most states will source the gain/loss from the sale of gold (tangible personal property as opposed to intangible) to situs of the sale transaction, there may be instances where a non-resident will have a state filing and tax obligation related to a sale merely because the gold was located in that state on the transaction date. For example, if a Florida resident takes title to and stores gold in New York, any gain on the sale of that gold would be New York sourced and would be subject to tax at the applicable income tax rate (as high as 8.97%)

ETFs are taxed either as a collectible or as an intangible asset depending on the structure of the ETF. Most physically-backed metal ETFs that invest directly in precious metals are structured as an investment trust and taxed as a collectible. Investors in an ETF structured as a trust are considered to have undivided beneficial interests in the assets held by the trust. Therefore, both the sale of the ETF shares held by the investor and the sale of the metal by the trust are treated as a sale of a collectible.

Gold future contracts are taxed under the provisions of IRC Sec. 1256, and all gains and losses are taxed as 60% long-term and 40% short-term, regardless of the investors holding period, resulting in an effective 23% tax rate. This blended rate is lower than both the short-term and long-term gains rates on a direct investment in gold itself. However, Sec. 1256 future contracts must be marked-to-market at the end of the year resulting in an overall gain or loss on both the realized and unrealized gains and losses of the contracts. Most states follow the federal treatment of Sec. 1256 contracts.

State Sales Taxes

When an investor purchases shares of stock in a gold mining corporation or enters into a Sec. 1256 contract there is no state or local sales tax on the purchase. However, the purchase of gold coins or bullion could result in state sales tax depending on the state in which the sale takes place.

There is very little conformity amongst the states with respect to the taxability of gold and other precious metals. The patchwork of rules creates traps for the unwary and it is advisable to conduct review of the sales tax laws on a state-by-state basis.

For example, New York exempts the sale of precious metal bullion which includes gold bars, ingots and gold coins (except coins from the Republic of South Africa) from state and local sales tax to the extent that:

  1. The total amount of the sale price on any single invoice exceeds $1,000.
  2. The consideration given cannot exceed 115% of the daily closing price of gold.
  3. The purchaser holds the gold in the same form as it was purchased and does not otherwise manufacture, fabricate or process the gold.

The requirement that the intrinsic value of the gold does not exceed 115% of the daily closing price of gold is designed to limit the exemption to the purchase of gold only and not to a collectible that, although may contain gold, has some other collectible or intangible value.

Connecticut's exemption for gold appears to be more stringent because it only covers instances where gold coins, bullion or legal tender are traded according to their value as precious metals; whereas the state of New York permits a 15% premium to be paid for the gold. However, as it relates to coins, Connecticut is more liberal with its exemption in that coins will be exempt from sales tax as long as they were legal tender at some point in their history.

New Jersey's exemption only applies to sales of gold provided that the sale is in fulfillment of the obligations of a contract for future delivery of gold or silver, or an option to purchase or sell such commodity, entered into on and in accordance with the rules of a licensed contract or options market.

Conclusion

When an investor decides to invest in gold it is important for the investor to understand both the tax ramifications and the different forms of investing in gold. Also, where the investor lives, where the sale takes place and where the gold is stored are equally important in understanding the tax ramifications of investing in gold.