Gyroscopic Investing

I've never bought physical gold and so far my PP gold portion exists in form of "paper" gold (ETFs and CEFs). I'm thinking about getting some physical gold and hence I have all kinds of questions, but right now I want to clarify the tax implications of physical gold ownership. I don't know if any of you bought AND sold gold, but the question is do you pay the collectible tax when you sell and how is this all documented? Do you have to keep invoices and report the sell in your tax returns? Is there a special IRS form for that? Are both bullion and coins sales taxed? Dies the gold seller (like Kitco or any other) report your gold purchase or sale to IRS?

I know taxing gold sounds ridiculous because gold is money. What if you just pay someone with gold or exchange gold for goods?

Thanks!

One short answer is that if you buy coins as only a small part of your overall PM holdings (the rest being in ETFs), then there is no reason to think that you would ever need to sell any of your coins (i.e., any rebalancing would occur in your ETF holdings).

This is one way of delaying the need to address any of the issues you raise for a long time.

MediumTex wrote: One short answer is that if you buy coins as only a small part of your overall PM holdings (the rest being in ETFs), then there is no reason to think that you would ever need to sell any of your coins (i.e., any rebalancing would occur in your ETF holdings).

This is one way of delaying the need to address any of the issues you raise for a long time.

Fully agree. I think for those in the accumulation phase it's better to use new money to balance out the gold gains by adding into  the other PP buckets. But still, at some point  - either due to need to rebalance after some spectacular run in gold prices or in the consumption phase - the question will rise. Any thoughts?

I would say report it as the sale of a collectible on the proper schedule, keep your purchase receipt to show your basis and pay the 28% tax on the gains.

To this I would only add to try very hard to chew up as much of these capital gains as possible with any capital losses you have readily at hand.  28% is an enormous tax bite.

Lone Wolf wrote: 28% is an enormous tax bite.

Don't forget state taxes.  5% about brings it to 33%.  I'm in Minnesota, so 35% for me.

I know it doesn't seem like much, but if it's the difference between people being complacent and people being angrily anal about avoiding taxes, I'll make the distinction.

Lone Wolf wrote: 28% is an enormous tax bite.

I don't mean to harp on this (I have no vested interest), but the possibility of paying the long term capital gains tax rather than the collectibles tax is one of the reasons I think GTU and PHYS are worth a serious look.  There are several distinct tradeoffs relative to GLD, IAU, and SGOL, but I think the difference between a 28% and 15% tax bite tilts the scales pretty heavily.

Between the skillful use of GTU and taking advantage of PM ETFs in a tax deferred account, there is no reason for the 28% tax on PM gains to ever affect any PP investor.

On a number of occasions, I have noticed that craigr has said that the tax on gold is actually "up to a maximum of 28% depending on your marginal rate." In other words, people in lower tax brackets would not have to pay 28%. Can anyone else confirm or deny this? I've seen conflicting interpretations from other sources.

rickb and MT, I completely agree with you about advantages of holding PFICs like GTU in a taxable account, my question was solely about physical gold. I thought having at least some physical gold was sort of widely-accepted recommendation on this forum - that's the only reason behind my forced interest to gold. Otherwise I would gladly limit my PM holdings to "paper" gold.  :D

MT, so do you think physical gold is not a must-have for a typical PP investor? Or perhaps I misread your question and what you mean is one should sell only "paper" gold if rebalancing required and never touch the physical portion of one's gold position

foglifter wrote: MT, so do you think physical gold is not a must-have for a typical PP investor?

I think that a PP allocation to gold consisting of bullion, GTU and one of the ETFs like IAU makes a lot of sense.

I think a PP investor should, however, always hold some physical gold.

MediumTex wrote:

foglifter wrote: MT, so do you think physical gold is not a must-have for a typical PP investor?

I think that a PP allocation to gold consisting of bullion, GTU and one of the ETFs like IAU makes a lot of sense.

I think a PP investor should, however, always hold some physical gold.

OK, so I did misread your post at first sight.

Thanks, now it makes sense.

Gumby wrote: On a number of occasions, I have noticed that craigr has said that the tax on gold is actually "up to a maximum of 28% depending on your marginal rate." In other words, people in lower tax brackets would not have to pay 28%. Can anyone else confirm or deny this? I've seen conflicting interpretations from other sources.

If you rmarginal rate is below 28%, that is the rate you pay on collectible gains. 

If your marginal tax rate is 28% or higher, you pay the 28% rate on collectible gains.

Check with your tax advisor for the last word on your own situation.

foglifter wrote: Dies the gold seller (like Kitco or any other) report your gold purchase or sale to IRS?

I'm curious about this, too. I have saved images of checks that I wrote to the dealer which I hope will suffice for cost basis. The dealer did not bother to send me an invoice for my largest purchase to date.

A friend of mine who is not interested in the permanent portfolio just sold some bullion coins that he inherited from a relative. They were merely found and divided up with siblings -- as far as I know, they were not mentioned in the will. So, I asked him how he would report the sale and how he would determine a cost basis. He told me he doesn't plan to report it at all.
(I would take the coins off his hands myself, but only collectibles remain. The non-numismatic coins were sold).

I won't have to worry about this, as I can sell my ETF shares, but whoever inherits my coins will have to deal with this situation.

As I write this, I see that gold briefly hit $1,500 an ounce.

dualstow wrote:I won't have to worry about this, as I can sell my ETF shares, but whoever inherits my coins will have to deal with this situation.

Assuming you live in the US, this won't be an issue.  Upon inheriting the coins the tax basis value of the coins will be their price on the day they were inherited.

Put another way - if you die in 10 years and a gold eagle is worth $10K, then the person inheriting the coin will have a basis of $10K. If they sell it the next day for $10K, they will pay no taxes.  Note that if your estate was large enough to hit inheritance taxes then the coins would be taxed upon inheritance however (at the estate tax rate, not the 28% rate).

Excellent, fnord. Thank you!

I was looking through these old threads and I just bought a couple of gold coins today and am waiting on them in the mail from goldmart. They stated that they do not report anything unless you pay in cash (read, NOT personal check) if it is over $10000. I'll be keeping the receipts and such but if they aren't reporting it, then wouldn't I be the only one to actually have knowledge of how much I paid for it?

From this viewpoint, couldn't you be "dishonest" and change an invoice to read as a higher cost basis to lower your taxable gains? I realize this would be illegal but I was wondering if anyone else would know besides you if the gold merchant you purchased from reported nothing during the sale. I just wanted to see if I had any holes in my thought process here.

Regardless of dishonest or not, I'd rather hold onto all of my receipts and keep the government from knowing what I have until I need to potentially sell it.

MediumTex wrote: Between the skillful use of GTU and taking advantage of PM ETFs in a tax deferred account, there is no reason for the 28% tax on PM gains to ever affect any PP investor.

Sorry if this has been hashed out a million times before, but what's the tax advantage of GTU vs the other ETFs?

Pointedstick wrote:
Sorry if this has been hashed out a million times before, but what's the tax advantage of GTU vs the other ETFs?

If you file the right IRS form every year you hold GTU in a taxable account (search for PFIC or form 8621), you'll pay taxes at the capital gains rate rather than the collectibles rate.

So if I understand this correctly, if I go through the hassle of filing a form 8621 every year, any taxable gain from the sale of PFIC ETF shares owned longer than a year would be taxed at the 15% long term capital gains rate instead of the 28% collectibles rate?

Next question: I wasn't able to find the expense ratios of GTU, PHYS, or the other non-US gold ETFs. What are they/where can I find them/are there any pitfalls involved in purchasing foreign ETFs?

Finally, if I wanted to swap the IAU in my taxable account for one of these PFIC ETFs, which one would folks recommend?

Pointedstick wrote: So if I understand this correctly, if I go through the hassle of filing a form 8621 every year, any taxable gain from the sale of PFIC ETF shares owned longer than a year would be taxed at the 15% long term capital gains rate instead of the 28% collectibles rate?

Next question: I wasn't able to find the expense ratios of GTU, PHYS, or the other non-US gold ETFs. What are they/where can I find them/are there any pitfalls involved in purchasing foreign ETFs?

Finally, if I wanted to swap the IAU in my taxable account for one of these PFIC ETFs, which one would folks recommend?

Yes.  If you file the form every year you end up paying the capital gains tax rate (which is scheduled to go up a bit next year).  Expense ratios are listed at http://www.cefconnect.com/Details/Summa ... =GTU.  Note that at least GTU does this very differently than IAU or GLD.  The ETFs basically take a small piece of the gold they own every year to pay their expenses and let the authorized participants keep any profit they make from creating/destroying shares.  GTU occasionally creates/destroys shares itself and manages to pay its expenses from the profit, so its gold assets aren't reduced because of the expense ratio.

GTU is run by the same folks who run CEF, which has been around for 40 years or so.  PHYS is only a few years old.  Although I believe they are very similar, based on the history of the sponsor I'd go with GTU.

As others have mentioned, if you're buying or selling GTU or PHYS you need to pay attention to the premium or discount, which can change very suddenly when a new share offer is announced.

A bit off topic, but one intra-PP trading strategy I have often thought about would be to split your gold holdings 50/50 between IAU and GTU.  As the GTU premium expands and contracts the percentage of your PP gold allocation attributable to GTU will rise and fall.  You might capture this fluctuation by "rebalancing" your gold allocation back to 50/50 when the percentages reached +/- 2% from the starting allocation.  Thus, if the GTU premium expanded to the point that the GTU/IAU ratio hit 52/48, you would rebalance back to 50/50.

If you are already committed to owning a fixed amount of gold in the form of the PP's 25% allocation, such a strategy might be workable, since you are only trading within the asset class based upon a known and reasonable well-understood variable--i.e., the GTU premium to NAV.

MediumTex wrote: A bit off topic, but one intra-PP trading strategy I have often thought about would be to split your gold holdings 50/50 between IAU and GTU.  As the GTU premium expands and contracts the percentage of your PP gold allocation attributable to GTU will rise and fall.  You might capture this fluctuation by "rebalancing" your gold allocation back to 50/50 when the percentages reached +/- 2% from the starting allocation.  Thus, if the GTU premium expanded to the point that the GTU/IAU ratio hit 52/48, you would rebalance back to 50/50.

If you are already committed to owning a fixed amount of gold in the form of the PP's 25% allocation, such a strategy might be workable, since you are only trading within the asset class based upon a known and reasonable well-understood variable--i.e., the GTU premium to NAV.

Coming back to my question then regarding a strategy such as this, are bullion/GTU/IAU sufficiently different enough apart then to keep them from being part of a wash sale if tax loss harvesting? They seem like they are all different but wanted to see if anyone had any first hand knowledge of this.

This seems like a good idea though MediumTex, I'm just wondering though if long-term capital gains goes up next year (I believe 15 to 20%) then having GTU at a slightly higher expense ratio to IAU might be kinda a wash tax/expense-wise.

EDIT: Modified 25% long term capital gains to 20% for the year 2013

According to Wikipedia, the long term capital gains rate next year will be 20% for assets held more than a year but 18% for assets held more than 5 years (10% and 8% if you're in the 15% tax bracket).

rickb wrote: According to Wikipedia, the long term capital gains rate next year will be 20% for assets held more than a year but 18% for assets held more than 5 years (10% and 8% if you're in the 15% tax bracket).

My mistake, I'll correct my last post. For some reason I thought I remembered reading 25%. Perhaps it was 25% for ordinary dividends, but now I'm not sure. Regardless thank you for the correction.

After looking up that wikipedia article I did find that interesting that they will have a 5-year capital gains tax rate. As far as I know that hasn't happened before (but again I could be wrong about this). Looks like from a PP perspective that with the very little amounts the portfolio is touched that it should be reasonably easy to hit those 5 year bands for lower taxes.