(Bloomberg) — Gold exchange-traded funds are one of the hottest investments this year, with war, inflation and stock market volatility sending people to a safe haven. But those buying physical gold ETFs may face unexpected tax burden.
Funds that invest in precious metals such as gold and silver are considered collectible for U.S. tax purposes, meaning a top rate of 28% on long-term capital gains from those funds, compared to a maximum rate of 20% for stocks. Tax will be levied. That could be costly for investors who decide to cash out after the recent rally in gold prices, which peaked at more than $2,000 an ounce earlier this month, up 20% from a year ago. was more than
This may come as a surprise to those who have recently started trading their own for the first time, eager to take advantage of rallies across almost every asset class. Starting trading has never been easier with apps like Robinhood and Weibull. But the tax implications are more difficult to understand, as reporting for stocks and crypto tokens is already causing confusion for some retail investors. Even for those who have spent years buying and selling ETFs, the intricacies of taxes on gold products can be unwanted news.
In addition, trading apps generally don’t provide a ton of information on the potential tax implications of different holdings.
“It’s complicated, and there are a lot of nuances to the tax code, so I think a lot of investors — even seasoned investors — aren’t aware of some of the intricacies of how investments are taxed,” said Christine Benz, personal director of fund researcher finance at Morningstar.
According to data compiled by Bloomberg, the entire category of gold ETFs has attracted more than $8 billion in new cash this year as investors sought a safe haven for their money amid stock-market volatility. This is a sharp change from 2021, when these funds lost nearly $13 billion as investors sold gold holdings and instead bought riskier assets such as cryptocurrencies and mem stocks.
“Gold’s relationship with the stock market becomes more and more negative, the higher the risk, the more significant the pullback,” said Juan Carlos Artigas, global research head at the World Gold Council. “The past few weeks have served as an example of this type of behavior,” as stocks fell and gold soared.
The two largest gold ETFs of all time – State Street’s Gold Shares ETF (GLD) and iShares Gold Trust (IAU), between which have approximately $100 billion in assets under management – both invest in physical gold bullion and make up most of the inflows. attracted this year. Even though these funds trade on exchanges like stocks, they are taxed at the same rate as physical gold coins or bars.
This is a quirk of US tax policy. When the top capital gains tax rate was lowered to 20% in the 1990s, collectibles were excluded and left at the old maximum rate of 28%. Since these ETFs are backed by a physical metal, their shares are treated in the same way as stamps, antiques or gems.
There’s more to taxes than just when deciding whether to invest in physical gold or stocks of gold mining companies, said Nate Geraci, president of investment advisor ETF Store.
“The tax should never be a dog’s tail,” said Geraci. “ETF taxation is something every investor should be aware of, but I don’t think the higher tax rate for physical gold ETFs should be the only reason investors look to gold mining ETFs.”
Brandon Raxczywski, vice president of ETF product management at VanEck, said that when gold prices are rising and when prices are falling, gold stocks outperform bullion. This is because mining costs rise more slowly than prices, allowing miners to boost their profits and potentially pay out more to shareholders through dividends. However, the same is true in reverse: Costs fall more slowly than gold prices in declines, affecting profitability.
“Gold stocks are heavily tied to gold, but come with their own risks and considerations, and taxes are one of them,” Raxjowski said.
VanEck’s own funds make this point clear: The VanEck Gold Miners ETF (GDX) is up 18% year-over-year, while the bullion-backed VanEck Merk Gold Trust (OUNZ), one of the few in the world, is up for investors. Allows them to take delivery of gold bullion in exchange for their shares have gained 5%. By comparison, the S&P 500 Index is down 5%.
Last year, when the S&P rose 27%, the GDX fell 11% and the OUNZ fell 4%.
Finally, investors should take into account the total cost of owning an ETF, including fees and commissions, when deciding how to invest.
“While the lowest-cost physical gold ETF you can find backed by a solid sponsor, it’s your best bet if you’ve been bitten by the gold bug,” said Ben Johnson, director of global ETF research at Morningstar. He also suggested that people buy products backed by physical gold through accounts such as IRAs, some of which defer taxation until retirement.
To contact the authors of this story:
Christine Overam in New York [email protected]
Claire Ballantine in New York [email protected]