Exchange traded funds (ETFs), like many other types of investments, have their own set of tax ins-and-outs. After the rally in commodities this year, particularly with precious metals, traders should be aware of the tax implications that come with investing in such ETFs.

The Internal Revenue Service views ownership of physical gold, other types of precious metals or any type of ETF backed by the precious metal as a collectible rather than an investment, comments Mark Biller for Sound Mind Investing. (How ETFs and ETNs are taxed).

How long you hold an investment or a collectible matters, too:

  • Both investments and collectibles are taxed at the ordinary income rate if held less than 12 months
  • Collectibles are taxed at 28% if held longer than 12 months

The IRS has also made an exception for IRAs holding gold and silver ETFs –  the standing rule states that IRAs can’t hold collectibles – and the money invested in the ETFs within an IRA aren’t subject to an early withdrawal penalty.

Precious metal ETFs are either backed by the actual metal or trade paper futures to approximate prices without owning the actual metal. For tax purposes, ETFs that aren’t backed by the metal are investments while “asset-backed” ETFs are considered collectibles. This is why it’s important to know what kind of ETF you’re holding, especially if you’re concerned with taxes. (Four types of commodity ETFs).

Furthermore, investors who own asset-backed ETFs own an “undivided interest in the actual metal that’s owned by the fund,” which means that if an ETF sells some hard assets to pay off costs, the gains or losses flow to the investor even if the investor doesn’t receive any distribution or cash. The result can be a K-1. (How to handle a K-1).

We are not tax experts and this should not be construed as advice. Investors should consult their tax professionals for additional details and information on how to proceed.

For more information on taxes, visit our tax category.

Max Chen contributed to this article.

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.