With the safest fixed-income investments--CDs, Treasury bonds, and money-market funds---paying next to nothing, investing in gold and other precious metals looks very appealing. But before jumping in to the market for the shiny stuff, be sure to understand all of the nuances and pitfalls.
Physical Ownership of Precious Metal Coins and Bullion
For individuals, there are no tax-law restrictions on direct physical ownership of precious metal coins and bullion. Such assets, however, are considered collectibles for federal income purposes. As such, any net long-term capital gains when these assets are sold by an individual taxpayer are subject to a maximum federal income tax rate of 28%, instead of the usual 15% maximum rate on long-term gains.
Here's how the 28% maximum rate deal works. If you are in the 28%, 33%, or 35% federal income tax bracket, your net long-term gains from collectibles are taxed at 28%. If you are in the 10%, 15%, or 25% bracket, your net long-term gains from collectibles are taxed at your regular rate of 10%, 15%, or 25%.
The other concern with direct physical ownership of precious metal assets is finding a secure place to store them. Burying them in your backyard is legal but not recommended. Using a bank safe deposit box is another possibility, but obtaining insurance coverage could be problematic. One of the best options is to hire a storage company to hold your precious metal assets. Several companies exist for this specific purpose, including the Delaware Depository Service Company.
Depending on the company, you may be able to have your precious metal assets stored on a fully segregated basis--where you continue to hold title to the assets and they are specifically identified and physically separated from everybody else's assets. Therefore, you can order your coins or bullion to be delivered to you at any time.
An alternative is known as allocated storage where the storage company basically acts as a custodian by holding precious metal assets that add up to what its customers collectively own. In this case, your share is commingled with all the other customers' shares, and you only have a piece of paper to show for it. If you demand delivery, it could take some time to convert your share into actual physical coins or bullion that could then be shipped to you.
Whether you choose segregated or allocated storage, make sure to ask about insurance coverage.
Indirect Precious Metal Investments via ETFs and Mining Stocks
Direct physical ownership of precious metal assets is not for everyone.
One option for those who are uncomfortable with the idea of physical ownership is buying shares of an exchange traded fund that tracks the value of particular precious metal. Popular precious metal ETFs include SPDR Gold Trust (GLD),
However, there is a little-known tax downside. The IRS has ruled that precious metal ETFs held in taxable accounts are also considered collectibles for federal income tax purposes. As such, any net long-term capital gains when these shares are sold by an individual taxpayer are subject to a maximum federal income tax rate of 28%, instead of the 15% rate you might be expecting. For more, find IRS Private Letter Rulings 200732026 and 200732027.
Another indirect way of investing in precious metals is to use your taxable brokerage firm account to invest in a mining company. For example, you could buy shares in Barrick Gold Corporation (ABX),
The Bottom Line
The important thing to take away from this story is that your profits from taxable investments in precious metal coins, bullion, and ETFs could be taxed at a higher-than-expected rate. That doesn't make acquiring some of these assets a bad idea, but it's something to think about before you decide to pull the trigger.
Another option is using your tax-deferred traditional IRA or tax-free Roth IRA to invest in precious metal assets. For the story on how that strategy might work, read Gold for Your IRA.