What is the most tax efficient way to invest in gold?

For most gold investors, long-term gains are better than short-term gains. However, strangely enough, investors who are in the tax bracket of 25% or less fare better with a short-term gain taxed with their ordinary income tax rate of 25%, rather than a long-term gain being taxed at 28%. Mutual funds and ETFs, as well as Gold IRA accounts, are generally the easiest and safest ways to invest in gold. Each share of these securities represents a fixed amount of gold, and you can easily buy or sell these funds in your brokerage or retirement account. Mutual funds and gold ETFs are a good option for beginning investors because of their low cost and low minimum investment requirements.

However, not all capital gains receive the same treatment. Most stocks and bonds qualify for a maximum tax rate of 15% on capital gains if you are in the tax bracket of 25% or more. For those in lower tax brackets, they may not have to pay any capital gains tax. That's a big advantage that gives you great incentives to invest for the long term.

Like all investments in an IRA, profits from gold sold within an IRA are not taxed until the cash is distributed to the taxpayer, and distributions are taxed at the taxpayer's marginal tax rate. Lucas' annualized after-tax return increases by more than two percentage points if you use a traditional IRA for your investment in gold mutual funds and more than three percentage points if you use a brokerage account if you use a traditional IRA for your investment in gold coins. In the case of brokerage accounts, an investment in gold mutual funds is more likely to offer a higher after-tax return than gold coins or a gold futures ETF. Emma and Lucas's results, shown in Figure 3, indicate that the after-tax returns on investments in gold in a traditional IRA far exceed those of investments in gold in a brokerage account or in a Roth IRA.

The typical approach to investing in gold futures contracts is by purchasing gold futures ETFs or ETNs. Even so, gold mining companies can offer a safer way to invest in gold than through direct ownership of ingots. Most gold investments can be held in an individual retirement account (IRA), which can significantly increase after-tax returns. However, for the average gold investor, mutual funds and ETFs are now generally the easiest and safest way to invest in gold.

Today, investors buy gold mainly as a hedge against political instability and inflation due to the low correlations of gold with other asset classes. Comparisons between hypothetical taxpayers generally indicate a significantly higher after-tax rate of return for any form of gold held in a traditional IRA than in a brokerage account and slightly higher than that of a Roth IRA. Instead, the average gold investor should consider mutual funds and gold-oriented ETFs, as these securities generally provide the easiest and safest way to invest in gold. The after-tax annualized return on gold coins is the lowest, approximately one percentage point lower than that of the gold investment fund, which receives the LTCG treatment.

An increasingly popular investment in gold is SPDR Gold Shares (GLD), an exchange-traded fund owned by State Street Global Advisors. Earnings from investments in physical gold and physical gold ETFs outside of an IRA are taxed as collectibles. It's also important to consider the differences in after-tax returns between the types of gold investments held in a brokerage account. Large investors who want to have direct exposure to the price of gold may prefer to invest in gold directly through ingots.