Gold ETF this week?
The first of the gold exchange-traded funds (ETFs) may begin trading
this week. Finally! Two gold ETFs are in registration - one from State
Street, one from Barclays; StateStreet just recently filed another
ammended registration statement. The proposed ticker is "GLD".
This is great news for investors for one simple reason:
Buying physical gold is expensive and a hassle. Commissions are
large relative to the commissions and spreads on buying equities, and
owners have to arrange for storage and insurance. Those factors have
probably inhibited many people from buying gold.
Yet gold is a distinct asset class from equities, bonds and
REITs, and therefore most investors who (correctly) care about asset
allocation and diversification will want to own some gold. Sure, gold
has been a lousy long-term investment. But in the last couple of years
the price of gold has turned upwards, and fears of inflation and a
falling dollar are once again stirring interest in gold.
One thing to watch out for, though. Long-term capital gains taxes on gold and the gold ETF will be higher than for stocks.
Gold is classified by the IRS as a "collectible". Neither of the two
gold ETFs in registration have managed to find a structure that
converts that status to one of an equity security. Why does this
matter? Because gains on gold are taxed at 28% if held for longer than
a year (and as "ordinary income" if held for a year or less). With
long-term capital gains on U.S equities at 15%, that puts the gold ETFs
at a significant disadvantage for taxable investors.
Here's the relevent excerpt from the GLD S-1:
Under
current law, gains recognized by individuals from the sale of
"collectibles," including gold bullion, held for more than one year are
taxed at a maximum rate of 28%, rather than the 15% rate applicable to
most other long-term capital gains. For these purposes, gain recognized
by an individual upon the sale of an interest in a trust that holds
collectibles is treated as gain recognized on the sale of collectibles,
to the extent that the gain is attributable to unrealized appreciation
in value of the collectibles held by the trust. Therefore, any gain
recognized by an individual US Shareholder attributable to a sale of
Shares held for more than one year, or attributable to the Trust's sale
of any gold bullion which the Shareholder is treated (through its
ownership of Shares) as having held for more than one year, generally
will be taxed at a maximum rate of 28%. The tax rates for capital gains
recognized upon the sale of assets held by an individual US Shareholder
for one year or less or by a taxpayer other than an individual US
taxpayer are generally the same as those at which ordinary income is
taxed.
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