Due to record high gold prices and a desire for portfolio diversification, U.S. investors may consider allocating a small percentage of their portfolio to precious metals and mining companies but have concerns about the amount of tax they will pay. Investors will usually have to pay capital gains tax on all profits from the sale of gold stocks at the federal and the state level, but they can take advantage of certain types of gold investments that will result in a lower tax burden at the federal level.
Gold investors can purchase shares in either Exchanged-traded Funds (ETFs), where a company holds a large pool of physical gold or gold futures, Closed-end Funds (CEFs), which only issue shares that cannot be redeemed until the fund closes, or gold mining and exploration companies (miners), according to ETF Gold. Investors who buy stock in gold miners and CEFs receive preferential tax treatment when they sell their stock, while the holders of Gold ETF shares face a significantly higher tax burden.
The federal government taxes profits earned from Gold ETF shares at a collectibles rate of 28 percent, regardless of how long an investor holds onto his stock, but CEFs and gold miner profits qualify for either short or long-term capital gains tax treatment. Regardless of the type of gold stock they sell, investors will not owe Social Security and Medicare tax on their profits as of the time of publication. Gold investors will have to report their profits on Schedule D of Form 1040.
Investors who hold onto their CEF or gold mining and exploration stocks for less than a year pay capital gains on profit at their regular income tax rates, which can reach as high as 35 percent as of the time of publication, according to the Internal Revenue Service (IRS). Individuals who hold onto their gold stocks for a time frame longer than a year before selling will pay either a 0 percent or 15 percent capital gains tax rate depending upon their regular income tax bracket.
State governments do not discriminate between profits based upon the type of gold stock an investor chooses. Most states will levy a flat or progressive rate on capital gains, but Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming have no capital gains tax as of the time of publication. Arkansas, Massachusetts, South Carolina and Wisconsin offer reduced capital gains rates to investors who hold onto their gold shares at least a year before they sell as of the time of publication, according to The REI Brain.
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