Gold has attracted a lot of investors for many decades, even centuries, because of its beauty and rarity. It explains why more or less half of the demand for this metal all over the world is from the jewelry world. Another 32% of its demand is for coins and bars, also called bullion. 

An investment in bullion in 2004 would provide investors a pretax annual return of over twelve percent over the next ten years. But the return is not without problems and risks. Over the past years, its price has dropped drastically, and a 2012 gold investment would have returned an annual pretax loss of at least 14%. But the unpredictability of commodities like this precious metal is only part of its long story. 

For tax purposes, these investments are categorized as collectibles. Gains on these things held for 12 months or less are taxed as regular income – the same treatment as STCGs or Short-Term Capital Gains. Gains on gold collectibles that were held for more than 12 months are taxed as a steady income, except for maximum collectible tax rates (28%). 

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These 28% max collectible tax rates are a bit higher compared to the 15% LTCG or Long-Term Capital Gain rates that apply to most taxpayers and the assets (20% max Long-Term Capital Gain rates applied to high-income taxpayers during tax years). This precious metal’s 12% yearly pretax returns declines to less than 10% over the past years on an after-tax basis. 

Still, if this investment had been classified as capital assets and taxed at 15% capital gain rates, the after-tax returns would have been at least 11%. To make it worse, losses on these collectibles are used to minimize capital gains. That is why, to maximize the after-tax return, a tax-efficient vehicle for these investments becomes pretty essential. 

One way to maximize profits is to use IRA or Individual Retirement Accounts. While this metal usually was not allowed in Individual Retirement Accounts, the most common types of gold investments, except for South African Krugerrand coins, can be bought within Individual Retirement Accounts.

Gold bullion bars and coins

These bullion bars and coins usually come to mind when talking about investing in this precious metal. One benefit of gold coins is that they can provide confidence when it comes to the accuracy of their weight and purity. While these coins can differ in fineness depending on the country in which they originated, they usually contain one troy ounce of this precious metal or about 1.1 

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United States ounces. Its spot price is traditionally the cost of one ounce on significant world commodity markets. The difference between the buy price and its selling price is the markup or the spread that sellers take as their profit. Its storing cost can also affect the price. 

A small deposit box that people usually use to store these things costs around $30 to $80 per year. Its annual fee charged by brokers’ ranges from 0.5% to 1% of its total value and usually includes insurance policies against loss and theft. Bullion bars are an excellent alternative to coins. There are a lot of bar issuers in the market today. The markup on these bars is traditionally lower compared to country-specific coins, but both things are tax collectibles.

Close-end funds and physical exchange-traded funds

ETFs or exchange-traded funds can provide investors another choice when buying bullion and trade like bonds or shares of stock. Each exchange-traded fund share represents a quantity of physical gold, usually one-tenth of a troy ounce. 

Exchange-traded funds allow people the convenience of purchasing and selling this precious metal just as they sell or buy common bonds or stocks, with a relatively low transaction cost. Another benefit of ETFs is that people are not responsible for precious metals storage, although most of them charge annual fees ranging from 0.25% to 0.5%. Like physical gold, these things are tax collectibles.

CEFs or closed-end funds are similar to an exchange-traded fund. It is traded like bonds or stocks, but they are structured as trusts. These shares represent undivided dividends in the fund’s investment portfolio. Tax treatments of closed-end funds are more complicated and can present advantages and disadvantages. Its tax complications can be reduced by making qualified electing fund under Section 1295 on Form 8621 of the Information Return by Shareholders of Qualified Electing Fund or Passive Foreign Investment Firms.