6 Legit Ways To Avoid Paying Capital Gains Taxes on Gold

When you sell an asset — such as gold — for a profit after holding it for more than one year, the money you make is considered to be a “capital gain.” In many cases, that means you will owe capital gains taxes on the profit.

Generally, capital gains enjoy more favorable tax rates than the rates on ordinary income, which is what you will pay in taxes if you hold gold or another asset for one year or less. But it’s still a good idea to minimize your capital gains taxes wherever you can.

Here are some money moves that can help you limit your tax bill when you sell gold for a profit.

The feeling of holding physical gold is alluring. But when you buy and sell physical gold, it’s difficult to avoid capital gains taxes. And if your income is high, you might pay more in taxes than you expect.

Some types of physical gold — such as coins and bars — are considered to be “collectibles” in the eyes of the IRS. Capital gains generated from the sale of collectible items are taxed at a maximum rate of 28%, which is higher than the usual top capital gains rate of 20%.

Luckily, you can include gold in your portfolio without stockpiling it in your house. Instead, you can purchase an ETF or mutual fund that gives you exposure to gold without owning it. With this style of investing, you’ll face a maximum capital gains tax rate of 20% instead of 28%.

Of course, this only lowers your capital gains tax, but does not eliminate it. To truly avoid capital gains taxes altogether, you could hold your gold ETF or mutual fund in an IRA.

Capital gains are broken down into two categories, short-term and long-term.

Short-term capital gains are generated when you sell an asset after holding it for one year or less. Short-term capital gains are taxed at your ordinary income rate. In some cases, these short-term gains can push you into a higher tax bracket.

In contrast, long-term capital gains are generated when you sell an asset after holding for more than one year. Long-term capital gains are taxed more favorably, at 0%, 15%, or 20%, depending on your taxable income. Generally, you’ll pay less in taxes if you hold the asset for more than one year.

This is another example of where you don’t technically avoid paying all capital gains taxes, but can reduce the tax you owe. And you can do so by holding gold ETFs and mutual funds longer than one year.

A 1031 exchange might be a creative way to avoid paying capital gains taxes on gold sales, at least for a little while.

If you intend to reinvest the profits into another similar asset, you might qualify to use a 1031 exchange to defer paying capital gains taxes. Essentially, you’ll need to make your new investment into another precious metal within 45 days of selling your gold.

Following the rules of a 1031 exchange — and avoiding paying taxes — can be tricky, especially the first time you use the option. So, you might want to consult with a tax professional or financial advisor before pursuing this option.

If you hold your gold in a taxable investment account, you could sell off poorly performing assets in the same year to offset the capital gains taxes you owe on your gold profits.

For example, you might sell an individual stock that’s tanked since you bought it and that shows no signs of recovering. If you lock in those losses, you can use them to offset your gains from the gold sale.

As we mentioned earlier in this story, one way to avoid paying capital gains on gold is to purchase gold ETFs and mutual funds in an IRA.

If you hold these funds in a traditional IRA, the money will be taxed at ordinary income tax rates when you withdraw it. If you keep your funds in a Roth IRA, you will never pay any taxes on gains.

Of course, the simplest way to avoid capital gains taxes is to avoid selling your gold altogether. When you hold on to your gold, you won’t create a taxable event.

For investors who want to build their portfolio for the long term, leaving gold untouched is a worthwhile option.

Whether you already own gold or plan to do so in the future, this precious metal is often just one part of a larger investment portfolio.

If you are ready to start investing, gold is one option. But it’s also a good idea to consider low-cost index funds and other investments.

If you are unsure where to start, consider meeting with a financial advisor who can help you develop the right investment plan for your goals.