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By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com

I have previously expressed concerns about owning precious metals exchange traded funds (ETFs) because of the possibility that some of the assets have multiple claims of ownership.  Now that we are past the deadline for filing taxes, precious metals ETF investors have learned the hard way that there is another difficulty—complex tax reporting.

The issue of taxes has gained more attention this year because of the greater number of people who own shares of precious metals ETFs.  To get full details, contact your tax advisor or the Internal Revenue Service.  In the meantime, let me share some simplified insights into the taxation of precious metals exchange traded funds.

cash reporting Another Reason To Avoid Precious Metal ETFs—Complex Tax ReportingMost precious metals ETFs, like other commodity ETFs, are not organized as corporations.  Instead, most are master limited partnerships.  Since precious metals ETFs periodically liquidate holdings to cover operating expenses, some as frequently as every three months, there will be taxable gains and losses to put on tax returns for each year of ownership.

Further, the ETFs that hold futures contracts are required to value such holdings at market vlue as of the end of the year.  What this means is that shareholders of these ETFs will have to pay taxes on the rise in metals’ prices as if their holdings were sold on December 31, even though the shareholder did not sell any shares that day.  Therefore, in rising markets, investors in a commodity ETF that holds futures contracts would have to report taxable gains or losses each year instead of waiting until they actually sell their shares in an ETF.

Adding to the complexity is that the gains or losses from commodity ETFS are considered 60% long-term and 40% short-term for tax reporting purposes.  The actual length of time that the investor held shares in the ETF makes no difference!

By being classified as short- or long-term gains and losses, there is the possibility that investors may not be able to deduct all of a loss in the same year that it occurred.

Such tax complications could be avoided by holding shares of precious metals ETFs in a retirement account such as a 401K or Individual Retirement Account (IRA).  However, withdrawals from retirement accounts are considered ordinary income rather than as capital gains which might be taxed at a lower rate.

Precious metals ETFs can serve an appropriate place in an overall investment portfolio.  However, don’t look only at the convenience of buying, owning, and selling shares in an ETF.  From a tax standpoint, it would be much simpler to buy, hold, and sell physical gold and silver.

pat heller Another Reason To Avoid Precious Metal ETFs—Complex Tax ReportingPatrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

 

 

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