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Physical Gold - U.S. and Canadian Tax Treatment

The following is the text of an e-mail I sent today to Subscribers of StockResearchPortal.com. StockResearchPortal.com is a research website that provides coverage on the approximate 1,600 Mining and Oil & Gas stocks listed on the Toronto and Toronto Venture Stock Exchanges.

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Qualification

This e-mail (read ‘Instablog’) has been prepared for background information only, and should not be taken or otherwise construed as either U.S. or Canadian Income Tax advice. Any reader owning or contemplating owning physical gold or shares of a gold ETF should seek the advice of their own income tax counsel with respect to the income tax treatment of their respective gains or losses on the disposition of either physical gold or gold ETF shares in the jurisdiction(s) in which they pay income tax.

Last week a friend of mine sent me an article that purported to discuss the tax treatment afforded U.S. taxpayers who purchase physical gold or gold ETF shares (the article also implied silver ETF shares would be afforded the same U.S. tax treatment as gold ETF shares). In its simplest terms, the article said that the U.S. Internal Revenue Service (NYSE:IRS) considers gold to be a ‘collectible’ and not a ‘capital asset’ - and that in these circumstances gains on physical gold are treated as ‘ordinary income’ for U.S. income tax purposes if that gold is held for less than 12 months, and can be subject to a 28% ‘maximum tax rate’ if held for more than 12 months (the U.S. capital gains tax apparently is 15% for capital assets held more than 12 months). A comment appended to that article by a reader says the IRS has made an exception for gold and silver ETF’s held in a U.S. Individual Retirement Account (’IRA’). I am simply reporting this without knowledge of U.S. income tax laws.

Following my review of that article and the comments appended to it I again reviewed my understanding of the Canadian Revenue Authority’s (’CRA’) view on this issue. In the simplest of terms, in 1978 the CRA issued an Interpretation Bulletin (IT-346R if you want to sound particularly knowledgeable when you talk to your Canadian income tax advisor) that deals with speculators’ ability to report commodity gains/losses on account of capital (i.e. and not as ‘income’) so long as a consistent approach is taken on all commodity transactions. There are also instances where Canadian Courts have found that gains from trading gold were on account of capital. Those things said, my experience in acting over the past 40 years both on behalf of Canadian taxpayers and the CRA in business valuation consultancy matters is that the CRA’s views in any taxation matter are dictated by the facts specific to that matter - such that generalities may not apply to a specific taxpayer’s (i.e. each individual reader’s) circumstance.

It follows from the foregoing I would not - nor do I believe should you - purchase or trade in physical gold or gold (or other) ETF shares without first seeking the advice of your income tax advisor with respect to how, based on your own specific ‘fact circumstances’, realized or unrealized gains or losses that accrue to either you or your Estate (on your death) will be treated for tax purposes in the jurisdiction(s) in which you pay, and your Estate may pay, income tax or capital gains tax.