Tax Basics for Commodity Investments

Physical gold, silver, platinum, and palladium are classified as collectibles under the Internal Revenue Code. Long-term capital gains (assets held more than one year) on collectibles are taxed at a maximum rate of 28%, higher than the 0%, 15%, or 20% rates that apply to most stocks and bonds.

This applies to physical bullion (bars, coins, rounds), numismatic coins, and jewelry made from precious metals. The 28% rate is a maximum; taxpayers in lower tax brackets may pay their ordinary income rate if it is below 28%.

Short-term capital gains (assets held one year or less) are taxed as ordinary income at your marginal tax rate, which can be as high as 37% for high earners.

Source: IRS Topic 409 - Capital Gains and Losses

Most gold and silver ETFs (such as GLD and SLV) are structured as grantor trusts that hold physical metal. For tax purposes, the IRS treats shares in these ETFs as ownership of the underlying collectible, subjecting gains to the 28% maximum collectibles rate.

This is true even though you trade ETF shares on a stock exchange and never take physical possession of metal. The trust structure passes through the collectibles treatment to shareholders.

Exception: Some ETFs and ETNs are structured differently and may receive standard capital gains treatment. Check the fund's prospectus and consult a tax advisor.

Source: IRS Publication 550 - Investment Income and Expenses

Shares of gold mining companies, silver miners, and oil and gas producers are regular corporate stocks. They receive standard capital gains treatment: 0%, 15%, or 20% long-term capital gains rates depending on your income, and ordinary income rates for short-term gains.

Dividends from these stocks are typically qualified dividends taxed at the favorable capital gains rates, assuming holding period requirements are met.

Mining and energy stock ETFs (like GDX or XLE) also receive standard capital gains treatment since they hold equities, not physical commodities.

Commodity futures (including gold, silver, and crude oil futures traded on exchanges like COMEX and NYMEX) are subject to special 60/40 tax treatment under IRC Section 1256.

Gains and losses are treated as 60% long-term and 40% short-term, regardless of how long you held the position. This blended rate typically results in a lower effective tax rate than the 28% collectibles rate.

Section 1256 contracts are also marked to market at year-end, meaning you recognize gains or losses on open positions as if you closed them on December 31, even if you continue holding them into the new year.

Source: IRS Topic 427 - Stock Options and IRS Form 6781 Instructions

Physical gold, silver, platinum, and palladium can be held in self-directed Individual Retirement Accounts (IRAs), subject to specific purity requirements:

• Gold must be 99.5% pure or higher
• Silver must be 99.9% pure or higher
• Platinum and palladium must be 99.95% pure or higher

The metals must be held by an IRS-approved custodian in a depository; you cannot store IRA metals at home. Certain coins (American Eagle bullion coins, Canadian Maple Leafs, Australian Kangaroos, etc.) meet the purity requirements. Collectible or numismatic coins generally do not qualify.

Tax Advantage: Inside an IRA, you do not pay the 28% collectibles rate when you sell. Traditional IRA distributions are taxed as ordinary income; Roth IRA distributions can be tax-free if requirements are met.

Source: IRS Publication 590-A - Contributions to IRAs

In addition to federal taxes, some states impose capital gains taxes (often at the same rate as ordinary income), and some states and localities charge sales tax on purchases of physical precious metals.

Sales tax rules vary widely: some states exempt investment-grade bullion, others tax it like any other purchase. If you buy online from an out-of-state dealer, you may owe use tax in your home state.

Check your state's Department of Revenue website or consult a local tax advisor for specifics.

Capital losses on collectibles (including physical metals and metal ETFs) can offset capital gains from other collectibles. If collectibles losses exceed collectibles gains, they can offset regular capital gains from stocks or bonds.

Up to $3,000 of net capital losses ($1,500 if married filing separately) can be deducted against ordinary income each year. Unused losses carry forward to future years.

Be aware of wash sale rules: if you sell an investment at a loss and buy a substantially identical investment within 30 days before or after the sale, the loss is disallowed for current-year tax purposes.