Turning to gold? Here’s how to avoid capital gains on gold

Gold has appreciated dramatically in recent years. This spring, the price of gold has hit a few record highs over $3,000 per ounce, marking a 100 percent increase over the last five years and a whopping 575 percent gain over the last 20 years. 

However, if you sell gold bars, coins or gold-backed investments like ETFs, any increase in value from the purchase price is considered taxable income when you sell.

And in some cases, you could face a higher tax burden because the IRS classifies gold as a collectible in certain situations.

If you sell gold within a year of purchasing it, your profits are taxed as short-term capital gains at your ordinary income tax rate. Meanwhile, if you hold it for more than a year, you may pay a higher collectible tax rate.

Here’s everything you need to know.

Taxes on selling physical gold

Gold, like other investments, is subject to capital gains tax when sold for a profit. This tax is only triggered at the time of sale though, meaning you don’t owe anything so long as you hold onto your gold. 

For investors who sold gold this year and made a profit, the IRS requires you to report those gains on your tax return. Capital gains tax rates vary depending on how long you held the gold before selling it.

Long-term capital gains tax on physical gold

When you’ve held physical gold for a year or longer, it doesn’t necessarily qualify for the lower long-term capital gains tax rates that apply to stocks, bonds and mutual funds. Instead, it’s considered a collectible by the IRS and may be taxed at a higher rate depending on your tax bracket.

Unlike traditional long-term capital gains, which are taxed at a rate of 0 percent, 15 percent or a maximum 20 percent based on your income, profits from collectibles are taxed at a maximum rate of 28 percent. That means if you make a $100,000 profit on gold you’ve held for more than a year, you could owe up to $28,000 in taxes.

• If you’re in a tax bracket of 24 percent or lower, the long-term gains tax on gold matches your ordinary income rate. So if you fall into the 22 percent tax bracket, you may pay 22 percent on gold profits — which is still higher than the 0 percent or 15 percent rates that usually applies to stocks and other securities. 
• If you’re in a tax bracket above 24 percent, your gold profits may be subject to the maximum 28 percent rate — which is higher than the 20 percent maximum rate on other long-term investments.

Taxes on collectibles are calculated before regular capital gains, which can push your other investment profits into a higher tax bracket. Tax rules prioritize ordinary income first, followed by collectibles and then capital gains. As a result, selling gold at a profit could increase the overall tax rate on all your investments.

There are ways to avoid this higher tax rate, though. Certain coins, such as American Eagle coins and other legal tender issued under U.S. or state law, are not considered collectibles for tax purposes. Additionally, if your gold meets specific purity standards and is held by an approved bank or trustee, you may be able to bypass the collectible classification. A self-directed gold IRA also has different tax rules.

Short-term capital gains tax on physical gold

Selling gold after holding it for less than one year results in short-term capital gains, which are taxed at the investor’s ordinary income tax rate.

Unlike long-term gains that can benefit from a potentially lower rate, short-term profits from gold sales could be taxed as high as 37 percent, depending on your income tax bracket.

This makes holding gold for more than a year before selling it a smart way to reduce tax liabilities, especially for people in higher income brackets who could otherwise get hit with steep short-term tax rates.

Taxes on gold ETFs and gold stocks

Investors who own gold ETFs or stocks in gold-adjacent businesses, such as mining companies, face a different set of tax rules. 

Gold stocks

Stocks of gold mining companies, like any other stock investment, are subject to traditional capital gains tax rates depending on how long you own them before selling. 

If held for more than a year, those stocks qualify for the lower long-term capital gains tax rate of 0 percent, 15 percent or 20 percent, depending on your taxable income.

Gold ETFs

Gold ETFs are a different story.

Long-term capital gains on sales of most gold ETFs are taxable at the collectibles rate, but it ultimately depends on if the fund is physically backed by precious metals.

Because these ETFs — such as SPDR Gold Shares (GLD), iShares Gold Trust (IAU) and abrdn Standard Gold ETF Trust (SGOL) — represent direct ownership of the underlying metal, selling a share is akin to selling the shiny stuff yourself in the eyes of the IRS, hence the collectibles tax rate. 

That means you could owe a maximum federal long-term tax rate of 28 percent when these ETFs are sold in taxable brokerage accounts. 

However, not all gold ETFs are physically backed. Some invest in gold mining or hold futures or options, which are taxed differently. Additionally, this 28 percent rate applies specifically to ETFs structured as trusts. ETFs with other structures or those not directly investing in metals avoid the higher collectible rate. However, most major gold ETFs, like the ones mentioned above, are structured as trusts. 

4 ways to avoid capital gains tax on gold

While taxes on gold sales can be significant, there are ways to minimize the tax bite — or avoid it entirely.

1. Don’t sell

The simplest way to avoid capital gains tax on gold is to hold onto it indefinitely. Since taxes are only owed after a sale, keeping gold eliminates the immediate tax burden. 

Many investors buy gold as a long-term store of value or as a hedge against economic instability. So holding the precious metal rather than selling it usually aligns with their overall investment goals anyway. 

2. Practice tax-loss harvesting

For investors with other collectibles, such as artwork, antiques or even NFTs, selling these assets at a loss can help offset taxable gains from gold sales.

If an investor realizes a significant profit from selling gold, they can strategically sell other collectibles at a loss in the same tax year to offset some or all of the gains. This strategy, known as tax-loss harvesting, is a common practice. 

Beyond just collectibles, if you hold gold in a regular taxable account, you can reduce your tax burden by using losses from your other investments to offset gains from your gold. 

If your gold losses exceed your gains, you can even use up to $3,000 of the extra loss to lower your taxable income. Any remaining loss can be carried forward to future tax years.

By realizing losses in strategic ways, you can significantly reduce or eliminate the capital gains tax you’ll owe on gold sales.

3. Deduct storage or insurance costs from your cost basis

The IRS lets investors add certain expenses related to investment assets to their cost basis, which can help reduce your taxable gains. For gold, this can include costs related to secure storage, insurance or even appraisal fees.

If an investor buys gold and pays for a secure vault or insurance policy to protect it, these costs can be factored into the total investment amount. This increases the cost basis, which lowers the overall taxable gain when the gold is eventually sold.

Make sure to keep detailed records of these expenses — along with purchase prices and sales transactions — to ensure they’re properly reported during tax time.

4. Use a gold IRA

A gold IRA is another way to legally shield gold from capital gains tax. This specialized self-directed IRA allows you to invest in physical gold and other non-traditional assets. While it follows standard IRA regulations, it comes with unique rules regarding gold storage and purity.

Taking physical possession of the gold or selling it for cash is also treated as an IRA withdrawal, subject to standard tax rules and reporting. Early withdrawal penalties may also apply.

With a traditional gold IRA, taxes are deferred until withdrawals begin in retirement, at which point distributions are taxed as ordinary income rather than capital gains. With a Roth gold IRA, contributions are made with after-tax dollars, and qualified withdrawals in retirement are completely tax-free.

However, strict IRS rules apply to gold IRAs. You’ll need to make sure you’re storing your gold in an approved depository. If the gold is stored improperly, it could result in immediate taxation and stiff penalties.

Bottom line

Selling physical gold can trigger substantial capital gains taxes since the IRS classifies gold as a collectible. To soften or eliminate the tax bite, you can hold gold for over a year or deduct related expenses on your tax return. Meanwhile, investing in a gold IRA allows for deferred or tax-free growth, depending on the account type. Consult with an experienced financial advisor or tax expert to explore all your options. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.