Over the past 12 years, as the U.S. stock market has soared and plunged but eventually landed pretty much right back where it started, investors have looked for alternatives to try to make money. Those who've turned to relatively safe assets like bonds have done quite well, as interest rates have collapsed to near-record lows and brought big capital gains to bondholders.
But among safe havens, gold has stood head and shoulders above bonds. With prices having more than quintupled over that time frame, gold has never been more popular. But if you're not smart about how you own gold, you can end up losing far more of those profits than you should to Uncle Sam in the form of higher taxes.
Below, I'll talk about some tax-efficient ways to own gold and other precious metals. But first, let's take a look at the problem and why taxes on gold can be higher than you'd expect.
Collectibles and you
When you buy something as an investment, whether it's a stock or a gold coin, the eventual profit or loss that you earn when you sell it is treated as a capital gain or loss for tax purposes. Typically, for investments you hold for a year or less, the short-term capital gains rate that applies is the same as your ordinary income tax rate. But if you own an investments for longer than a year before you sell it, then you qualify for special long-term capital gains rates.
Not all capital gains are treated the same, however. Most stocks and bonds qualify for a 15% maximum capital gains tax rate if you're in the 25% tax bracket or higher. For those in lower tax brackets, you may not have to pay any capital gains tax at all. That's a huge benefit that gives you big incentives to invest for the long haul.
Gold bullion, however, doesn't qualify for those particular low rates. The IRS treats gold coins and bullion as collectibles, for which the maximum capital gains rate is a much higher 28%. What that means from a practical standpoint is that most middle-income investors get no benefit from capital gains on gold, while top-bracket taxpayers get a small break but not nearly as much as they would on a regular stock.
Can ETFs save the day?
Exchange-traded funds have become a popular way to trade gold and other precious metals. But many of them also suffer from the same tax treatment. So like gold coin investors, owners of SPDR Gold
But some exchange-traded products have tried to take advantage of obscure rules to get back into the 15%-maximum capital-gains realm. The Sprott Physical Gold Trust
One downside of the closed-end structure is that shares can trade at a premium to the value of their underlying bullion, meaning you'll have to pay above then-prevailing spot prices to get shares. But the tax advantages may well be worth that extra price for many investors.
A simpler way
Another way to profit from bullion-price moves without worrying about tax uncertainties is simply to pick mining stocks that produce gold. Shares of big miners Barrick Gold
Taxes should never be the sole driver of an investment decision, but it's smart to take taxes into account. The right gold investment might be able to save you a ton in tax if your position becomes profitable.
Precious metals investors should be aware of an opportunity that could have huge potential. Read The Motley Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.
Fool contributor Dan Caplinger likes things that glitter. He doesn't own shares of the companies mentioned in this article, although he does own gold and silver bullion coins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is golden.