Gold Bug - Important news about Federal Tax Rates
posted Nov 30, 2011 by Dave Desmarais, CPA/PFS, MST, MBA, AEP®
Gold has become a popular investment over the last few years and in particular this year after the spot gold price hit an all time high of over $1,900 per ounce in September. Many individuals have diversified their investment portfolios with some exposure to gold. In addition, there are individuals, which you may be one of them, who have taken on a much bigger position in gold for many different reasons.
There are many ways to invest in gold, such as buying gold coins, bullion, gold mining companies, and through exchange traded funds (ETFs) and mutual funds.
However, if you are one of the fortunate ones who caught the gold bug early and have long term gains with your gold investments that have not been taxed yet, you should be aware that these long term gains may not be taxed at the 15% federal tax rate like other traditional investments that are held for over year such as stocks and bonds.
Direct investments in gold coins, gold bullions and through a popular ETF, SPDR Gold Shares (GLD ticker symbol) are considered a collectible for tax purposes and are taxed at 28% if these investments are held for over a year. GLD invests directly in physical gold bullion and is structured in such a way that is similar to owning the gold bullion outright. Examples of other collectible’s, are art, rugs, antiques, gems, metals (such as silver and platinum), stamps and coins. If you are a resident in Massachusetts, Massachusetts taxes gains on collectibles at 12%. Combine that with the federal rate of 28% and you are looking at a combined tax rate of 40%.
In contrast, an investment in a gold mining company with a long term gain (held for over 1 year) qualifies for the 15% tax rate federally and 5.3% for Massachusetts tax purposes. With the exception of this year, gold mining companies traditionally have moved in price in the same direction as gold prices.
As we close in on the end of 2011, what can be done to minimize the tax on the sale of gold as you reallocate your investment portfolio? Look to see if you have any capital loss carryovers from 2010 and any unrealized capital losses in your current portfolio to recognize before year end. The timing of utilizing these capital losses now will be better served offsetting a 28% gain rather than a 15% gain in the future (for Massachusetts taxpayer, you are offsetting a 40% gain rather than a 20.3% gain).
If you sell any current investment positions in your portfolio, you need to be aware of the wash sale rule. In order to recognize the loss on an investment such as a 100 shares of Coca Cola, you cannot buy substantially identical securities within 30 days before or after the sale. In this example you would have to wait 30 days after to purchase Coca Cola. There are ways to keep your portfolio intact and not run afoul of the wash sale rule, such as replacing Coca Cola with Pepsi to keep exposure to the same industry or double up on Coca Cola by buying same amount of shares today and waiting 31 days to sell the original shares for loss.
As you can see there are detailed tax implications to think about when investing in gold and we recommend speaking with a professional about your needs. Please contact a member of our Private Client Services Group at any time at 888-KLR-8557 to discuss your situation.