Despite Record Gold Prices, Your Holdings May be Worth Less Than You Think

[Editor's Note: Gold closed at a new high of $1,370.50 an ounce in New York yesterday (Wednesday), the sixteenth record close in the last five weeks. Money Morning's Keith Fitz-Gerald says there's plenty more to come, too: In fact, he expects gold to double in five years or less. But at the end of that stretch, he warns, your profits may not be what you're expecting. Find out why.]

Record gold prices are becoming an almost-daily headline, with the "yellow metal" making a run at $1,400 an ounce. And while this is great for the investors who are along for the ride, there is an important caveat - your gold may not be worth as much as you think it is.

Moreover, because of the tax consequences of ownership, chances are it'll never add up to what those guys hawking gold coins on late night TV lead you to believe.

But that doesn't mean you shouldn't invest. With an estimated $202 trillion in unfunded pension liabilities and the global public debt clock ticking higher, I believe gold and other precious metals should be a part of every investor's portfolio.

I believe gold is going to double in the next five years and am not alone in my expectations that all metals will be much higher - not in a straight line, mind you, but higher than their current values. Legendary investor Jim Rogers and U.S. Global Investors Inc. (Nasdaq: GROW) Chief Executive Officer (CEO) Frank Holmes are just two of the experts who have voiced similar opinions about higher gold prices in the future.

So what's the problem?

According to the Internal Revenue Service (IRS), gold is considered a collectible - a capital asset with its own tax rate. This makes it no different from art, antiques, stamps, certain coins, wines, or your favorite single-malt scotch for that matter.

No doubt this will come as a rude surprise for millions of people who think they are investing in the precious metal. And if you think this isn't a big deal, think again.
Gary E. Ham of the Beaverton, Ore.-based accounting firm of Jones & Ham P.C., notes that gold does not qualify for the 15% minimum tax bite that many investors consider routine when calculating gains on investments held more than a year (by that I'm referring to long-term capital gains).

Instead, profits from gold investments are subject to a 28% maximum tax rate if held for more than 12 months. And, if those investments are sold in less than a year, the profits from gold count as ordinary income, which can also be taxed at far higher rates. (And those "higher" rates could become a whole lot higher in the future, depending upon what strategies present and future White House administrations resort to in order to deal with the mounds of debt U.S. taxpayers will be financing for generations to come.)

On the bright side, taxes aren't triggered until there is a "taxable event," meaning you buy or sell your gold.

It's worth noting that the same is true for losses in that you can't use them to offset other taxes if you haven't actually had a taxable event.

However, the same is not true for investors who chose one of several popular metals exchange-traded funds (ETFs) like the SPDR Gold Trust (NYSE: GLD), the iShares Silver Trust (NYSE: SLV), or the iShares COMEX Gold Trust (NYSE: IAU). Holders of these investments can be held accountable every step of the way.

Precious metals ETFs are set up as something called a "grantor trust," according to Barron's and the IRS. This means that ETF investors are treated as owning undivided interests in the actual metal that's owned by the fund. Therefore, when the ETF sells some of its gold for any reason, investors are liable for gains or losses from the sale. And this has to be reported to the IRS as part of gross income even if a cash distribution from the sale is never received.

There also are wrinkles depending on how an ETF achieves its objectives. For instance, both the PowerShares DB Gold Fund (NYSE: DGL) and PowerShares Silver Fund (NYSE: DBS) use futures contracts to mimic underlying direct gold investments.

This means that they fall prey to something the IRS calls the "mark-to-market" method, which stipulates that any futures contracts held at the end of a calendar year will be treated as if they were sold at fair market value. This is called a "deemed sale."

Where this matters to investors is that each shareholder is then, in turn, liable for his or her pro-rata share of the taxes on the deemed sale even if the underlying asset (the futures contracts the fund owns) haven't actually been sold.

The one area of wiggle room still left to investors who want to own precious metals funds, and who also want to potentially mitigate the tax impacts of doing so, is to hold such investments in their IRAs or 401(k) plans.

But - and I often get this question - coin collectors should note that regular gold coins don't qualify. The IRS says you can include only 24 karat gold bullion and coins demonstrating a 0.995+ fineness and silver coins and bars with 0.999+ fineness in tax-deferred accounts.

If you're beginning to get the idea that the IRS wants a piece of your hide no matter how you invest in precious metals, you're right. That's certainly the case, and I can't possibly cover all the scenarios, so I'll end with one final thought.

No matter whether you are just beginning to invest in gold or have established a meaningful position in the precious metal, please take a minute to talk with your accountant or tax professional.

If gold doubles in five years or less - as I expect it will - the last thing you'll want to do is hand over a sizable portion of your gains to Uncle Sam just because you made the right decision to preserve your wealth.

[Editor's Note: Commentator and best-selling author Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. If you missed out on all or part of that run, don't despair: Subscribers to his newest service, TheMicroQuake Alert, will be able to benefit from the insights of one of the shrewdest investors in the marketplace today. To find out more about MicroQuake, please click here.]

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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