With U.S. tax season upon us, this is a good time to revisit an important difference in how most precious metals ETFs (GLD, IAU, SLV) are taxed compared to most other ETFs and consider a potential GLD trade and tax loss harvesting strategy that could save you both on future taxes and on ETF management fees.
If you added a little gold to your portfolio in the past few years, you're now feeling pretty smart. If you bought GLD in your IRA, you're in good shape and can skip the tax loss harvesting bit below, though you may still want to consider swapping for lower cost IAU and save yourself 15 bps per year in management fees ($150 on $100,000 investment).
If you're like me and didn't have quite enough space in your IRA when you first bought your gold ETF, then not only are you sitting on a potentially large capital gain, but when it's time to sell if you're a higher income earner, you will likely be taxed at the 28% collectibles rate, nearly twice as high as the 15% long-term capital gains tax rate that applies to most other ETF gains.
Here is a tax planning strategy that may help. Current market volatility has likely produced some investments with tax losses in your portfolio. You can use a standard ETF tax loss harvesting technique - selling a mutual fund or stock at a loss and immediately buying an ETF that most closely matches that exposure - to generate a capital loss. That's step one.
Here's the twist: Now that you've booked this capital loss, you can sell GLD and recognize the gain. If you still want to maintain exposure to gold, you can buy IAU to replace your GLD position. Average bid/ask spreads on GLD, IAU and SLV are $0.01, so your transaction costs to execute this trade should be very low. In the case of swapping GLD for IAU, this will be more than offset by IAU's lower management fee as described above.
Where does all this buying and selling leave you on an after-tax basis? Under the current capital gain and loss netting rules, you'll be able to net your losses above from your GLD gain and effectively exchange a loss in a security normally taxed at 15% long-term cap gains for a gold security taxed at the 28% collectibles rate (assuming your regular income tax rate is not lower than 28%).
Higher income earners have long used a similar technique to offset much higher ordinary income rates with investment losses, but unlike netting capital gains and losses above, in the case of offsetting ordinary income, alas, taxpayers are limited to $3,000/year, which has not even been indexed for inflation.
Like all things tax-related, if you are unsure or have a more complex tax situation, you should talk to your tax advisor before you trade, but now you'll be armed with the right questions to ask.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.