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).