Gold exchange-traded funds are one of this year’s hottest investments, with war, inflation and stock-market volatility sending people scrambling for safe havens. But those buying physical gold ETFs may face an unexpected tax burden.
Funds that invest in precious metals like gold and silver are treated like collectibles for U.S. tax purposes, meaning long-term capital gains from those funds will be taxed at a top rate of 28%, compared with a maximum rate of 20% for stocks. This could be costly for investors who decide to cash out after the recent rally in gold prices, which hit a peak of over $2,000 an ounce earlier this month, up more than 20% from a year ago.
It might come as a surprise for people who recently started making their own trades for the first time, eager to take advantage of rallies in almost every asset class. With apps like Robinhood and Webull, it’s never been easier to start trading.
But understanding the tax implications is more difficult, with the reporting for stocks and crypto tokens already creating confusion for some retail investors. Even for those who have spent years buying and selling ETFs, the intricacies of taxes on gold products might be unwelcome news.
Plus, trading apps typically don’t provide a ton of information on the potential tax ramifications of different holdings. That’s a sharp turnaround from 2021, when these funds lost nearly $13 billion as investors sold gold holdings and instead bought riskier assets like cryptocurrencies and meme stocks.
The two largest gold ETFs by far with assets under management of nearly $100 billion between them, both invest in physical gold bullion and have attracted the majority of the inflows this year. Even though these funds trade on exchanges like stocks, they’re taxed at the same rate as physical gold coins or bars.
It’s a quirk of U.S. 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%. Because these ETFs are backed by physical metal, their shares are treated the same way as stamps, antiques or gems.
There’s more to consider besides taxes when deciding whether to invest in physical gold or the stocks of gold mining companies. Gold stocks tend to outperform bullion when gold prices are rising and underperform when prices are falling.
That is because mining costs tend to rise more slowly than prices, allowing miners to boost their profits and potentially pay out more to shareholders via dividends. However, the same is true in reverse: Costs fall more slowly than gold prices in downturns, weighing on profitability.
Ultimately, investors should take into account the total cost of owning an ETF, including fees and commissions, when deciding how to invest.