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Millions of investors who bought gold in the last 12 months are undoubtedly very happy at the moment – considering that the yellow metal has risen 60% since last November to a recent close of $1,138.60 an ounce on Monday.
But chances are good that many won't be smiling when they discover just what the taxman has planned for their gains.
Unbeknownst to most investors, gold is considered a collectible not a capital asset. In plain English, this means that despite the fact that many people believe they are investing in gold, the Internal Revenue Service (IRS) believes that they are collecting it.
This is no small distinction and hurts investors because it means that gold does not qualify for the 15% maximum tax bite that most of us employ as a matter of routine when we mentally calculate profits earned on investments held for more than a year. That 15% cut for Uncle Sam is the long-term capital gains tax rate that applies to most stock or mutual fund investments.
Precious metals are a completely different story. Profits from these "investments" can be subject to a 28% maximum tax rate if held for more than 12 months. And if they are sold in less than a year, the profits count as ordinary income.
The long and the short of it "is that as a result of gold's spectacular run-up, many investors may have a tax problem they haven't counted on when they go to sell," said Gary E. Ham Jr., of the Oregon-based accounting firm of Jones & Ham PC
This may be especially true for investors who have piled into such asset-backed, exchange-traded funds (ETFs) as the SPDR Gold Trust (NYSE: GLD), the iShares Silver Trust (NYSE: SLV) and the iShares COMEX Gold Trust (NYSE: IAU), for example, because precious-metals ETFs are set up as something called a "grantor trust." According to Barron's, ETF investors are treated as owning undivided interests in the actual metal that's owned by the fund. Therefore, 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.
Adding insult to injury, if the ETF sells some of its hard assets to pay expenses or management fees – as many have done recently, the resultant gains (or losses) flow directly through to investors and shareholders even if those investors don't receive any distribution or cash whatsoever.
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And the net results can be mighty startling. For example, Doug Fabian, president of Fabian Wealth Strategies, a California-based investment advisor, noted several painful examples in an article on his firm's Web site about the tax traps of commodity ETFs, including:
- An investor who experienced a trading loss of $741 in the United States Oil Fund LP (NYSE: USO) – with no interest received – but a K-1 tax form reporting a taxable profit of $9,136 and interest of $210.
- Another who had actual trading profits in the United States Natural Gas Fund LP (NYSE: UNG) of $1,900, with no interest received, and a K-1 reporting taxable profits of $4,319 and $120 in interest.
- An investor who had an enviable trading profit of $4,335 in the PowerShares DB Agriculture (NYSE: DBA), without receiving any interest – activity that triggered a K-1 form that reported profits of $6,963 and interest of $207.
- Finally, an investor who notched trading profits of $337 and no interest in the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) triggered a K-1 listing profits of $3,406 and interest of $195.
K-1's, in case you are not familiar with them, are tax forms used by partnerships, corporations and ETFs to report a partner or a shareholder's share of distributed profits and income. If you own one of the ETFs I've just mentioned, chances are you'll be getting one just after the New Year to file with your taxes.
Here's how this works.
Because the XYZ ETF does not pay income taxes itself, its profits are passed through to the actual owners – in this case, the shareholders, who must claim those profits as their own. If you own 50% of XYZ ETF, and XYZ files for a $100,000 profit in 2009, you'll receive a K-1 for 50% of the net profits – or $50,000 – which you then will have to claim on your personal 2009 income-tax return.
By the way, conventional gold and metals stocks – gold producers are a good potential example of what we mean – are treated "normally," so investors who have chosen to buy these more-traditional investment vehicles will escape these "unexpected" tax consequences.
If there is a moral to the story, it's that nothing is what it seems anymore – not even gold.
[Editor's Note: Keith Fitz-Gerald is the chief investment strategist for Money Morning and The Money Map Report. Fitz-Gerald has pulled all his best thoughts together in his new book, "Fiscal Hangover: How to Profit From the New Global Economy." The reviews are excellent. Investors interested in ordering the book can save $10 off the cover price at Amazon.com. Just click here.]
News and Related Story Links:
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FiscalHangover.com:
The Official Web Site for "Fiscal Hangover: How to Profit From the New Global Economy," by Money Morning Chief Investment Strategist Keith Fitz-Gerald. -
Amazon.com:
How to Order "Fiscal Hangover" With a $10 Discount From the Cover Price. -
"Fiscal Hangover" Book Excerpt:
Where to Find Big Profits in a Post-Crash World. -
"Fiscal Hangover" Book Excerpt:
The 10 Rules for Successful Investing. -
Jones & Ham PC:
Official Web Site. -
YourDictionary.com:
Grantor Trust. -
IRS.gov:
Tax Code. -
Fabian Wealth Strategies:
Official Web Site. -
Yahoo!Answers:
What is a Schedule K1 Tax Form and What is it Used For?
Tags: Gold, Gold Bubble, Gold Prices, Investment
Its funny,
this kind of argument always put forward by people who missed the bus intially.
you always pay texes on 'profits', whatever may be the defination in texman's books.
and gold buyers will remain winner for very long.
If gold is a stupid investment, first seller should imerge from Fort Knox :)
Good answer…US owns more gold in Ft Knox (8100) tons than any other Country….
or so they claim. Bullion (tungsten/gold) has not been seen (audited) for decades…
so if this is the case then it would be seen as likely that many will abandon eventurally these ETF's and go to more 'traditional' stock investments.
If you hold these funds in an IRA or a Roth IRA will there still be a K-1 and tax issues?
If you purchase gold within a ROTH IRA there is no tax when you withdraw funds for use…per the rules of ROTH IRAs. You buy with already taxed dollars and pay no tax on earnings.
This is a perfect example of how the government is trying to clamp down on entrepreneurs. Sure, they may be able to tax profits, drive companies out of business with tons of regulations, tax gold profits, tax anything that benefits someone other than them and their friends.
This is all true.
But (so far) they can't stop people from saying enough is enough and leaving the country. I imagine that right around the time that they do try to stop people from leaving, they "The Government" will be facing serious problems @ home.
May I forward this info to others? I'm building a web site and may want to include this ETF tax problem in it. Is that OK ? Credit to MM is a given. Also, How does this affect folks who shorted these ETFs naked or legal?
Isn't one sure way to avoid these tax troubles is to take physical possession of the gold instead of buying the paper.
That's what I did and I don't regret that one bit.
The IRS has made an exception for gold and silver ETFs held in an IRA. On August 10, 2007, the IRS privately ruled that shares of ETFs in the form of a trust that mirror the price of physical gold and silver do not constitute an acquisition of a collectible if they are acquired in an IRA. As a result, the IRS does not consider money invested in shares of gold and silver ETFs within an IRA to be a distribution subject to an early withdrawal penalty.(1)
This is really good news because it means: (1) you can hold shares of gold and silver ETFs in an IRA, (2) the money you’ve invested in gold or silver ETFs in an IRA won’t be considered an early withdrawal, and (3) you won’t be subject to the 28% long-term tax rate on collectibles on those shares. So there’s no reason (at least at this time) to worry about how to avoid the collectibles tax rate when holding gold or silver ETF shares in an IRA. It doesn’t apply.
To Marlys:
No, you will not be sent a K-1 for GLD, SLV, etc. if in an IRA.
Yes, you WILL be sent one for ETFs that are actually Master Limited Partnerships (MLP). These include DBA, DBC, USO, etc. Always read the prospectus!
If you hold MLPs in an IRA, I believe that the K-1 shows taxes owed by the custodian of the IRA (the company you have the IRA with). But the company/custodian would likely bill you for this or ask that you pay it.
This IRS ruling is really wrong. It is a pure and simple tax grab.
I didn't know about the collector rule until after I sold an item for a windfall. That being said, I had the pleasure of owning and enjoying the art work I sold for a windfall until I sold it.
A Gold ETF is at most a piece of paper(stock) and more realistically a line on a stock account statement purchased for the purpose of hedging/investing in a commodity for profit.
A buyer of this ETF most likely could not take possession of any gold without selling the ETF and replacing it with purchased gold.
The ETF is invested in with the purpose of making money or protecting the rest of a portfolio, not to enjoy the shine/craft of the the gold or goldsmith.
It is interesting that gold dealers tipically pitch as a difference between gold bullion and other gold coins that bullion can be taxed as a normal investment instead of being taxed as a collectible. E.g. http://www.coingallery.com/faqLegal_IssuesGold.htm#Do I have to pay taxes
Individual investors who, as individual investors, lost money on ETFs must nevertheless pay taxes for profits??? This is a NEW DEFINITION for the word "profit." It is not just a new way of taxing profits.
Susan–thanks so much. Very helpful info.
I believe your horror stories (nasty surprises) are somewhat misleading – all those investors / traders would adjust the basis in their positions by an amount equal to the gains / losses income / expense reported on the K-1. This makes the k-1 income / loss a wash matching the real world.
e.g. trading purchase price $1000, selling price $900 (trading loss=$100), interest reported on K-1 = $100. REPORTED: proceeds from sale = $900, adjusted basis = $1,000 + $100 = $1100 => loss REPORTED = $200
This is yet another reason to deal with gold the way my friends do. For several years, whenever they receive their paychecks, they pay their mortgage or rent in dollars, then convert most of the rest into physical gold.
The key is, they never sell their gold. Instead, when they want to buy something, they exchange the appropriate number of 1oz gold bars (or coins) for whatever they want to buy. This worked surprisingly well. Once they figured out a few techniques to improve their odds to convince reluctant people and stores to accept gold, they found they could exchange gold for more than 90% of the products they would have had to buy otherwise.
It has been amazing to watch how they convinced virtually every store to exchange products for gold. Lately, however, resistance to gold has turned into anxious, happy acceptance of gold, as everyone realizes the fiat dollar scam is unraveling. You should see other customers just stare when my friends exchange a tiny gold bar for a huge pile of goodies at Fry's for example — a sight to behold. :-)
This is a great way to avoid all these problems. Because your savings are held in gold, you protect the value of your savings from destruction by the elitist gangster banksters in the FederalReserve and government. When you exchange your gold for products you want or need, this is an equal exchange (and unrecorded too, since they never provide their real names, much less any form of legal ID).
Forget paper — paper is the most astronomical scam in the history of mankind (paper money, paper stocks, paper bonds, paper futures, paper options, every paper instrument). Though you don't lose your shirt every time, you do feed the beasts that have utterly destroyed civilization, and turned most folks into lifetime debt slaves.
As an aside, few folks understand how much lower prices would be if "fiat debt" did not exist. The full price of a house, for example, would be less than the 20% down payment on a conventional mortgage. All products would be vastly cheaper, and careful analysis implies the average products would be 8 times cheaper (cost 12% as much as they do now). This is the main reason two parents must work to survive, when only one needed to work a generation ago. This is the main way the elitist gangsters have stolen the world from honest productive folks. They have the power to simply print money at zero cost, then loan it to working folks and pocket the interest they charge. What a scam! But even worse is the phenomenon I mention – that eventually the cost of all products rises to the point where they can "afford" the monthly interest payments on the items they buy where previously ONE of those payments was the entire price of the item!
Get physical gold, and never "sell it" in the conventional sense. In other words, throw off the shackles and return to the simple life. All you need to remember is "money == gold". You can even find this in the constitution (never repealed).
In gold we trust.
UNLESS SOMEONE DRILLS THE BARS?
I would like someone to discuss the IRS treatment of losses in regard to K-1s. As I understand the situation which I could be completely wrong the loss reported on a K-1 can only be used against gains on K-1s and the loss cannot be used against income other than K-1 income. Losses have to be carried back or forward to years when a K-1 gain was incurred. Also how does an investor handle the lost on the sale of an ETF such as USO or UNG and still have at year end a loss on the K-1 with no other K-1 gains to offset the K-1 loss? There are IRS instructions included with the K-1s when they are sent out(they are usually sent way late) but as usual for the common person such as I they are clear as mud as to the treatment of losses. Of course any interest income included in a K-1 is always reportable income. There should be a warning in all brokerage firms warning investors about the tax problems associated with ETFs that are LLCs. There are many investment advisory idiots(for the lack of a better word) that push these type of ETFs either not caring what they are pushing or they are just plain dumb as to the tax problems.
Central Fund of Canada (CEF) which only holds approximately equal quantities of gold and silver is treated differently from GLD, etc. since it pays a cash dividend. Any profits from sale of the funds shares is treated as a capital gain, and taxed accordingly. There are special tax forms that must be submitted, and the fund does usually trade at a premium over the value of its metal holdings.
There is a 15% tax in Cnanada…….
If you are a non-resident allien will there still be a K-1 and tax issues?
Also, ETFs that hold physical commodiities, like GLD and SLV, do not have the K-1 problem because they are not organized as partnerships.
There is a way to sell your gold holdings without having to pay a 28% tax on the capital gain just as there is a way to sell real estate and stocks without paying a tax on the capital gain.
I've written about it in my book, "Buy Gold Safely."
Also Dave (comment #6), taking possession of gold doesn't preclude you from paying taxes on the gain when you sell it. You are on the honor system to do so. Whether or not the government knows about it doesn't excuse you from paying the tax.
My book, which also exposes gold dealers can be found at http://safelybuygold.com/gc.html
It's not cheap, but neither is the tax you pay on gold profits.
Disclosure: I don't sell gold, I just write about it.
How are options on these ETF's treated for tax purposes?
I am assumung that options in these ETFs will not present a tax problem unless the option is exercised. Response?
While the IRS does not allow "collectibles" to be held in your Roth IRA, exceptions have been made for certain gold and silver coins. So it is possible to avoid these taxes through your Roth IRA, and still invest in gold and silver. However, as with any investment, take the time to understand the potential pitfalls before jumping in.
Taxing gold profits should be illegal.
First you exchange the fiat paper currency to preserve whatever value it has. The Governement with the help of our central bank debases these pieces of paper so they are worth even less. Then when you want to exchange the gold back into currency, the Government taxes us for having protected ourselves from their theft.
This is insane, immoral, and criminal.
Sure, it's insane, immoral and criminal. The whole stinking Internal Revenue Code is also, along with the IRS itself, because the 16th Amdt was never properly ratified by the states. It will hurt, when our rotten system collapses. But when it does, I believe former IRS revenue officers and tax-thugs will be in the same position that the East German STAZI found themselves when the Communist regime collapsed. I hope each and every one of these vicious bastards gets prosecuted for crimes against the American people. And the judges of the lower Federal Courts who gave them permission to "stick it" year after year to American wage earners should be hung from the nearest lamp – post.
HIGH ANXIETY
Keith's other suggestions pointing out that much of the future economic growth in the world will be outside of the United States correct. Still, 25% of the world's GDP will still remain in the U.S. We are still a big country, even if a less well managed one. However, many of the same challenges to investing apply overseas, as well as at home.
Picking the best companies in the right sectors is always a challenge. Most important, not paying too much for any investment is still very important. If you overpay for GOLD (at current prices) or a domestic or foreign stock, you may not make near as much money as otherwise would be the case.
Clearly, the abilitiy to consistantly pick winning stocks ("10 Baggers") at a good discount and hold them long term to enjoy a "home run" is a fairly rare ability. Many professional portfolio managers can not consistantly do it. Instead, they trade in and out of companies, producing mediocre total returns.
In order to show above average returns, you need an Apple or two in your portfolio- not necessarily Gold. Gold is responding to today's legislative, fiscal, and monetary policy mishaps. Eventually, all the distortions must be wrung-out of our economy. In Japan, it took over ten years (1990-2002), also known as the "Lost Decade". Until then, high volatility and anxiety will remain, going into the New Year.
After WW2 in Japan the grocers had so much gold in their cash registers that they refused to take any more in exchange because they couldn't exchange it. So exchange became Lucky Strikes, Camels, chocolate bars etc. You see folks you can't eat or drink gold. Guess all the crowd are "youngin's". Thanks for the conversation, intriguing times. De old man.
Nice post, young man.
It reminds me of advice I've read: namely, that we can eat canned SPAM more easily than gold.
Then there's that particle of Roman history which describes how molten gold was poured into the throat of someone named as tyrant/terrorist, perhaps.
I suspect the noble metal was retrieved.
Regards to all.
where do you buy physical gold without the premiums ?
What do they say about allocated digital gold currency like GoldMoney.com ?
Mark
The post by "TAXES" is right on the money (figuratively and literally). Taking the first example in the article where the trader has a $741 loss on USO and then receives a K-1 reporting different amounts, you simply make the necessary adjustments/offsets to back into the true figure of a loss of $741. You are supposed to file your tax return using the actual gain or loss notwithstanding the fact that a different figure might be reported elsewhere. Of course, this cuts both ways. If you have a larger gain than what is reported on the K-1, you might be tempted to file your return using the lower K-1 figure and plead ignorant that the gain was actually more. Good luck should you decide to use that strategy! "Ignorance" never holds up in tax court.
I am just happy that I can afford to buy gold and other investment vehicles. There are too many among us, though not likely readers of Money Morning, who are trying to figure out how to stay in their homes or pay the rent, decide whether to have electricity or food, medicine or heat. My accountant used to tell me to be grateful to be one of those making enough that I actually paid some tax. "Tis the season.
I just purchased Vienna gold coins as a life insurance policy. When I am much older and fiat currency will be worthless I will still be able to put food on the table.
I could live with the commission I paid but was rather surprised of the high premium cost.
hi Keith, Im writing to you to see if you can help me get started with my investments. Over the past years Ive lost a ton of money trying to time the markets. I have purchased you china trader and am reading your book Fiscal Hangover, my problem is I have a bout 20k to get started and need a little help finding the right stock to buy to make those 100 and 200% profits and build from there, please help me get satarted, just looking for some guidance thank-you Arnold Wenzler. my account number is 000051157411 thx again arnold
you just lost me as a reader when you bought a Toyota…nice American!!!!!!
I AM NOT MAKING ANY COMMET ON THE VARIOUS SUBJECT PEOPLE WROTE TO YOU ABOUT.I WANT TO ASK YOU SOMETYING ABOUT OPTIONS.IF I AM BUYING A CALL OPTIONAND I WANTTO PUY A (STOP LOSS)DO I PUT THE STOP ON THE (ASK PRICE) OR THE STOCK PRICE? THE MAIN REASON IS THATI DO NOT WANT TO LOOSE ANY MONEY AS YOU KNOW BEEN A TRADER YOUR SELF .TAKE FOR E.G THE S.PIS $40.00 S.P IS 20.00 PREMIUM IS 3.00,WHERE DO I PUT MY STOP IF I DO NOT WANT TO LOOSE ANY MONEY IS THIS A CONTINGENCY ORDER?I AM GETTING CON FLECTING IN FORMATION FROM DIFFERENT COMPANIES.I WOULD APPRECIATE A REPLY THANK YOU.
Do you know about the Zurich Kantonal Bank Gold Corp? In the U.S. it is traded on the OTC pink sheets and is very thinly traded under the symbol ZKBGF. As I understand it, each share represents 1oz of gold and is priced accordingly. Zurich KB stores the gold in their vaults and is segregated as to shareholder. I have not been able to find an English prospectus for this, only a simplified version of the prospectus, which isn't complete. They will not make a shipment of gold outside of Switzerland but will transport it to another Swiss Bank to be delivered in bullion to the US.
Can the U.S. Government confiscate the gold bullion if it's stored in Switzerland or only gold that is held in the U.S. as was done by Franklin Roosevelt?
Hope you can shed come light on this.
C. Chappell
Well we all talk about the printing press running wild on the dollar, What happens when the drilling press starts and we get over flowed with GOLD will that drive down the price of gold also?
I never hear about the dilution of gold.
a small farmer all my life now trying to invest am always told I must have a broker. I want to invest directly with whom I will place my investment
Someone has to say it: If you don't hold it, you don't own it.
Kieth Fitz-Gerald warns that we are taxed on our share of an ETF on the fund's annual K-1. Is that based on the total return for the year? How is "our share" computed? Suppose I am in and out of GLD five times during the year, some gains and some losses. What is my share of the total fund. How is performance during the time I was in related to total performance? Looks like a bookkeeping nightmare. What'ds a man to do? Avoid GLD?
Joe
The question (Mar. 11th) re: where to place the stop order on an option……I use the "Bid" price.
What is the reason to talk about gold and k-1's being related. I thought k-1 partnerships
could only be energy related.
please send us some guidline how to invest into general Motor.
rubbish, you don't buy gold (bullions or otherwise);
you buy mining companies doing 100% gold spot basis,
and that is just a company like any other, so tax capped.
stay away from GM,
it is not general and it is not motor.
it is a black hole, a cash trap.
xxi century and still producing v8 camaros!
gimme a break
As the Dollar depreciates in value (Fiat Furrency ) , so does the Gold increase its value in dollars !
So you are not really making any money when the price of Gold goes up the roof; you are only compensating for the devaluation of the Dollar. And if on top of that you have to pay 28% taxes on the profit that you did not really make, you are being royally screwed ! Your are better off just spending your money as soon as you get your hands on it, before it devalues more, and before the US Dollars stops being the World's Reserve Currency, when it will officially become practically worthless and the Rimimbi will own the world as we know it. God SOS . CQ
Question; What do you suggest on IRA withdrawals. I will be taking my 1st withdrawal this year and I will have to pay taxes on what I withdraw. If part of the withdrawal comes from gold-GLD etf will I have to pay on the etf and my total withdrawal. Will I be paying taxes twice? John Kish