When you invest in Exchange-traded Funds (ETFs) that hold physical commodities like gold, silver, or other metals, you might assume that holding these ETFs for more than a year will qualify you for the long-term capital gains tax rate. However, this assumption can lead to a costly tax surprise.
The U.S. tax code treats certain assets, such as physical gold and silver, as collectibles. Under the IRC §408, part (m), collectibles are subject to a maximum long-term capital gains tax rate of 28%, which is significantly higher than the standard long-term capital gains rates (0%, 15%, or 20%, depending on your income level).
Many commodity-based ETFs hold physical metals. For example, SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) are popular ETFs that hold physical gold and silver, respectively. These ETFs are structured as grantor trusts, meaning that investors are treated as owning a pro-rata share of the underlying physical metal.
Because these ETFs hold physical commodities, the IRS treats any gains from these investments as gains from the sale of collectibles. This means that if you hold these ETFs for more than a year, your gains will be taxed at the collectible tax rate of up to 28%, rather than the standard long-term capital gains rates.
Additionally, if your income is high enough to be subject to the Net Investment Income Tax (NIIT) under the Affordable Care Act (ACA), you could face an additional 3.8% surcharge on your investment income, bringing your effective tax rate on these gains to as high as 31.8%.
Reporting Requirements Gains from these ETFs are typically reported on a Schedule K-1, rather than the more common Form 1099-B used for most stock and ETF transactions. The Schedule K-1 is the same form used for partnership returns and can be more complex to handle. Each field on the K-1 must be reported in the appropriate section of your Form 1040.
Before investing, verify whether the ETF holds physical commodities or uses futures contracts. ETFs using futures contracts may not be subject to the collectible tax rate. If possible, hold these ETFs in tax-advantaged accounts like IRAs or 401(k)s, where gains are either tax-deferred or tax-free, depending on the account type.
Commodity-based ETFs that hold physical metals offer exposure to those assets, but mind the tax implications: the higher collectible tax rate and the complexity of Schedule K-1 reporting can significantly cut your after-tax returns.