Exchange traded funds (ETF) that track or hold gold and silver have seen a wave of inflows in assets. But do you know the tax responsibilities that come with these ETFs?

According to tax code, gold, silver and precious metals receive special treatment – the IRS views them as “collectibles” rather than capital assets. They don’t qualify for the maximum 15% tax rate on long-term capital gains. (Will the gold rally last?)

Bob Carlson for Barron’s reports that 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 they are held for less than one year, gains are taxed as regular income.(Other metals to play besides gold and silver.)

Here are some other facts about precious metals ETFs that Carlson notes:

  • 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.
  • 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. Rather, 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.
  • Evidently, these rules do not apply when gold or silver is bought for a retirement account through an ETF. Retirement accounts are treated as having purchased fund shares, not the collectibles held by a fund. It is not treated as a distribution to the owner.

Note that we’re not tax professionals, and you should call your tax consultant for specific advice.

For more stories about precious metals, visit our precious metals category. To get prepared for April 15, visit our tax category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.