How Do You Avoid Capital Gains Tax on Precious Metals? A Simple Guide

When it comes to taxes, we all want to minimize them as much as possible. The same applies to capital gains tax when buying and selling gold, silver, and other precious metals. If you want your investments to be successful, smart tax planning is essential.

Fortunately, there are ways to reduce the tax implications when. you sell gold. Here are some of the most common strategies!

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Capital Gains Tax on Gold and Silver

First things first, what is a capital gain? This is the profit you make from selling an investment. To take it a step further, the IRS classifies these profits into one of two categories:

Earned Income

Salaries, wages, or any other type of pay you receive in exchange for products or services forms part of your income. You will pay income tax on the money you make from your employment or carrying on of a trade.

Capital Gain

You will pay capital gains taxes on the sale of any physical asset investments. This tax is based on the long-term capital gains of an asset based on market changes over the years.

Both of these criteria are used by the IRS to categorize various financial investments, including rental properties. The organization requires you to pay taxes on your rental revenue as well as capital gains on the money you make when you sell the investment property.

Also Read: How Much Gold Does the Average American Own?

The capital gains tax rate is much lower than the earned income rate. Additionally, because gold is a financial asset, any profits made from its sale are taxed as capital gains. However, based on how you held your precious metal, you will either have to pay taxes at a general rate of 28% or at the ordinary capital gains rate.

Gold is not considered a separate class of assets by the IRS. This indicates that there are no specific capital gains tax regulations that apply to gold. The best way to reduce your tax burden is to make wise, comprehensive tax planning.

How Do You Minimize Capital Gains Taxes on Precious Metals?

If you want to reduce your tax liability, here are three strategies that could help:

Hold Your Investment Asset for At Least One Year

The IRS classifies a capital gain as short-term if you sell an investment less than a year after purchasing it. Because of this, your profits won’t be eligible for the unique, lower capital gains tax brackets because they would be taxed as ordinary income.

If you can, sell your investments after at least a year to prevent this. If not, you will be subject to higher income tax rates.

Avoid Physical Assets

There are many ways to invest in gold, but most often, investors choose to do so directly through physical gold coins and bullion, which means that you possess actual, tangible amounts of gold.

As an alternative, you can also make investments in securities that, in essence, buy the metals on your behalf. You may, for instance, invest in an ETF whose portfolio includes significant amounts of actual gold. In this scenario, you would indirectly own gold bullion.

This may significantly raise your tax bill. In fact, there’s a good chance it will. Don’t buy physical gold if you want to avoid this!

Finding ETFs and mutual funds that specifically state this approach is a particularly wise course of action. Investments in financial instruments such as options and futures contracts are not regarded as tangible assets by the IRS; thus, they are taxed at a maximum rate of 20% as conventional capital gains.

Think About a 1031 Exchange

If you’re looking for more flexibility, a 1031 exchange is the way to go. This enables you to postpone paying capital gains taxes as long as you reinvest the proceeds in another financial item.

Usually, you have 45 days after selling the previous investment to create this new one. If you sell gold, you would need to reinvest the proceeds in precious metals because the investment must be similarly positioned. Additionally, you must have a third party retain the funds because they become taxable the moment capital gains are deposited into your bank account.

Use This Capital Gains Tax Advice Today!

Gold is subject to capital gains tax by the IRS in the same way as other investment assets. However, you will probably owe a higher tax rate of 28% as a collectible if you purchased actual gold. You can keep your capital gains taxes at the standard long-term capital gains rate by avoiding investments in physical gold or precious metals. Additionally, if at all feasible, wait at least a year before selling your gold investments to avoid paying higher income taxes.