Gold Is Precious to the IRS, Too



By Bob Carlson
Monday, November 16, 2009

Precious-metals sellers could face a bigger tax bite than they expect.

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.

The SPDR Gold Trust (ticker: GLD), a popular gold-backed ETF, instructs shareholders on its Website how to compute the gain or loss when the ETF sells metal to pay expenses. (See http://www.spdrgoldshares.com/media/GLD/file/SPDR_Gold_Trust_2008_Tax_Information.pdf.)

These tax rules also apply to other precious-metals ETFs, such as the iShares Comex Gold Trust (IAU) and iShares Silver Trust (SLV). But they don't apply to ETFs that use futures or derivative contracts to track the performance of metals, such as PowerShares DB Gold (DGL), PowerShares DB Silver (DBS) and PowerShares DB Precious Metals (DBP). Exchange-Traded Note funds, or ETNs, also have different tax rules, as do ETFs that buy stock in companies in precious-metals-related businesses.

Investors aren't allowed to own collectibles in Individual Retirement Arrangements, or IRAs, and other self-directed retirement accounts, including 401(k) plans. When gold and silver are purchased for such accounts, an amount equal to the cost of acquiring the collectible is treated as a distribution to the owner. It is included in gross income and taxed at ordinary rates, although an additional 10% penalty might apply if the owner is under age 59½.

THESE RULES APPARENTLY don't apply when gold or silver are purchased for a retirement account through an ETF, although the Internal Revenue Service hasn't stated its view publicly. Instead it has issued opinions in private-letter rulings and internal documents, including letters to the major precious-metals ETFs.

Based on such documentation, retirement accounts are treated as having purchased fund shares, not the collectibles held by a fund. Thus, the cost of purchasing a gold or silver ETF in a retirement account wouldn't be treated as a distribution to the owner.

The prospectus of the iShares Comex Gold Trust, for instance, states that the sponsor has received a private-letter ruling from the IRS; it provides that purchase of the fund by various types of retirement accounts doesn't constitute the acquisition of a collectible and won't be treated as resulting in a taxable distribution to a retirement-plan participant. There is one exception: If the fund was to sell its precious metals and distribute the metal in kind to shareholders, those transactions would be treated as the acquisition of a collectible.

The Bottom Line

Gains on the sale of precious metals and related exchange-traded funds are subject to tax rates as high as 28% when such investments have been held for more than a year.

A PRIVATE-LETTER RULING is applicable only to the taxpayer who asked for and received the ruling. It may not be used or cited by other taxpayers as precedent in court cases. But it reveals the thinking of the IRS on an issue, and auditors generally follow it. In addition, most tax advisors believe a taxpayer in a similar situation can safely rely on the ruling.

Gold has rallied about 25% since the end of 2008, so precious-metals ETFs are likely to remain popular with investors. Thus, fund holders would do well to familiarize themselves with the tax issues pertaining to such holdings.

Put another way, a golden opportunity isn't always what it seems.

BOB CARLSON is editor of the newsletter Retirement Watch and the Website www.RetirementWatch.com

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