By Ed Coyne, Senior Managing Director, Global Sales
2020 was a tremendous year for precious metals investments. Gold bullion gained 25.12% in 2020. Silver bullion rose 47.89%. Palladium climbed 25.86% and platinum increased 10.92%.[1] Tax time is here, and it is critically important for investors — especially after a strong year like 2020 — to understand the potential tax ramifications of owning physical precious metals.
For many U.S. investors the returns provided by owning physical gold — and the other precious metals including silver, platinum and palladium — come with a sobering surprise when the assets are sold and it’s time to pay taxes. The reason: The U.S. Internal Revenue Service (IRS) categorizes gold and other precious metals as “collectibles” which are taxed at a 28% long-term capital gains rate. Gains on most other assets held for more than one year are subject to the 15% or 20% long-term capital gains rates.
Collectibles are Taxed at 28%
This is the case not just for gold coins and bars but also for most ETFs (exchange-traded funds) which are taxed at 28%. Many investors, including financial advisors, run into trouble owning these investments. They assume, incorrectly, that because the gold ETF trades like a stock that it will also be taxed like a stock, which are subject to the long-term capital gains rate of 15% or 20%.
Investors often perceive the high costs of owning gold as the dealer markups and storage fees for physical gold, or management fees and trading costs for gold funds. In reality, taxes may represent a significant cost in owning gold and other precious metals.
Fortunately, there is a relatively easy way to minimize the tax implications of owning gold and other precious metals.
PFICs are Taxed at 15% or 20% — A Tax-Friendly Way to Own Gold
For U.S. individual investors, Sprott Physical Bullion Trusts may offer more favorable tax treatment than comparable ETFs. Because the trusts are domiciled in Canada and categorized as Passive Foreign Investment Companies (PFIC), U.S. non-corporate investors are eligible for standard long-term capital gains rates on the sale or redemption of their units. Again, these rates are 15% or 20%, depending on income, for units held for more than one year at the time of the sale.
To be eligible, investors — or their financial advisors — need to make a Qualifying Electing Fund (QEF) election for each trust by completing IRS Form 8621 and filing it with their U.S. income tax return.
While no investor relishes filling out additional tax forms, the tax savings of owning gold through one of the Sprott Physical Bullion Trusts and making the annual election can be well worth it.
Consider the hypothetical example of an investor who invests $50,000 in gold and realizes an 8% annual return (see #2). After five years, that investment is worth $73,466, and the investor will be required to pay taxes on the appreciated amount of $23,466. If the investment, say a gold bullion ETF, is taxed at the 28% collectibles tax rate, the investor will owe $6,571. By contrast, the investor would owe $4,693 in taxes for gold owned in a PFIC and taxed at the 20% long-term capital gains rate. In this example, owning a PFIC saves the investor nearly 30% in taxes.
Tax Comparison for Hypothetical Investments
1. Hypothetical $10,000 Investment
| Year | Hypothetical 8%
Annual Return* |
Realized Gain | 15% Long-Term
Capital Gains Tax |
20% Long-Term
Capital Gains Tax |
28%
Collectibles Tax |
| 5 | $14,693 | $4,693 | $704 | $939 | $1,314 |
| 10 | $21,589 | $11,589 | $1,738 | $2,318 | $3,245 |
2. Hypothetical $50,000 Investment
| Year | Hypothetical 8%
Annual Return* |
Realized Gain | 15% Long-Term
Capital Gains Tax |
20% Long-Term
Capital Gains Tax |
28%
Collectibles Tax |
| 5 | $73,466 | $23,466 | $3,520 | $4,693 | $6,571 |
| 10 | $107,946 | $57,946 | $8,692 | $11,589 | $16,225 |
3. Hypothetical $100,000 Investment
| Year | Hypothetical 8%
Annual Return* |
Realized Gain | 15% Long-Term
Capital Gains Tax |
20% Long-Term
Capital Gains Tax |
28%
Collectibles Tax |
| 5 | $146,933 | $46,933 | $7,040 | $9,389 | $13,141 |
| 10 | $215,892 | $115,892 | $17,384 | $23,178 | $32,450 |
*The 8% annual return is based on a hypothetical annual average rate of return.
Investors always want to consider the full cost of ownership when weighing different precious metals investment options. That said, given that investors stand to save quite a bit on taxes, considering PFICs like Sprott Physical Bullion Trusts makes sense — especially when prices are trending higher.
To learn more about Sprott Physical Bullion Trusts, ask your financial advisor or Sprott representative for more information.
Originally published by Sprott, 3/15/21
| 1 | Gold bullion is measured by the Bloomberg GOLDS Comdty Index; silver bullion is measured by Bloomberg Silver (XAG Curncy) U.S. dollar spot rate; palladium is measured Bloomberg XPD Curncy U.S. dollar spot rate; and platinum is measured by Bloomberg XPT Curncy U.S. dollar spot rate. |
| 2 | Source: IRS 2020 Schedule D Instructions. |
Sprott Physical Bullion Trusts
Sprott Asset Management LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the prospectus carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing. The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction. The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
