Last-Minute Tax Tips For ETF Investors

December 27, 2013

If you hold one of these popular ETFs, you may have some great opportunities to lower your tax bill.

We talk a lot about the tax benefits of ETFs. Most of the time, what we’re talking about is the fact that few ETFs even make capital gains distributions, and even those that do tend to be quite small. That’s all true, and it’s because of the way creation/redemption works.

But there’s another thing that’s great about ETFs and taxes: They make taking advantage of losses extremely easy. And this year, it’s particularly interesting for investors with any interest at all in gold. Here are my top tips for ETF investors facing capital gains on their 1040 tax form come April. (I should point out that I am not a CPA, and if you have any concerns about your investment tax situation, do what I do and call an accountant.)

1. Harvest your gold losses immediately.

If you’ve been hanging on to, say, the SPDR Gold Shares (GLD | A-100) this year, you’re down a whopping 25 percent. If you have any capital gains at all, you should consider how you can use that loss to help offset your gains.

However, here’s the special thing about GLD and its ilk. All of the physical bullion ETFs are treated as collectibles, which means the maximum long-term capital gains rate is 28 percent. That’s terrible, when you have a gain. When you have a loss, it’s irrelevant. You can use that capital loss to offset capital gains (long term to long term, or short term to short term).

“But I don’t want to not be in gold!” I hear you cry. Well, here’s the other tricky thing. If you ask any certified public accountant, they will tell you that collectibles are not subject to wash-sale rules. In other words, you can technically sell gold in the morning, and buy it back in the afternoon, and it’s not considered a wash sale by the IRS. How is this possible? Because the rules for wash sales only apply to “securities.”

Now, here’s where it gets tricky. Nobody I talked to has ever seen anything definitive—from the IRS—on the tax treatment of bullion ETFs. So if you’re nervous about whether the IRS might change their minds on GLD versus gold bullion tomorrow, you have other options.

First, you could replace your bullion exposure with futures exposure in the short term. The PowerShares DB Gold ETF (DGL | B-46) is a perfectly fine short-term substitute, and correlates at .99 to the price of gold. Long term, it has tax and expense downsides, but short term, you’ll avoid any issues on wash sales and still keep your exposure.

Of course, you could also change teams, as it were, and choose the Market Vectors Gold Miners ETF (GDX | A-54). Despite being equities, it correlated at .98 to gold on a day-to-day basis, so it would certainly give you some exposure to any surprise January gold rally, and there are additional reasons to consider it a valid flyer.



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