Buying gold or silver is a time-honored way of saving for the future, providing a stable investment that helps guard against market fluctuations and economic instability. But if you’re thinking of taking your first step into precious metals investment, it’s important to know all the costs and pitfalls involved that could take the shine off your returns.
The tax situation for gold and silver investment is a little complicated, with the IRS treating it differently than many other investment vehicles. What’s more, each state has its own laws governing precious metals, with some charging a sales tax on every transaction and others offering a list of exemptions that can quickly become unwieldy to navigate through.
How Are Gold and Precious Metals Taxed?
At a national level, the IRS classes gold, silver, and other precious metals as capital assets, and so any long-term returns made on your investment will attract capital gains tax. To further complicate the situation, the IRS classes precious metal as a collectible item rather than a pure investment, and this places it into a higher tax rate than most other investment products.
For any profits made after at least a year of ownership, the capital gains tax rate for gold and silver equals your marginal tax rate, but with a maximum level of 28%, even if you’re in a higher tax bracket. Any profit made from buying and selling over less than one year is considered regular income and will be taxed at your usual rate.
By contrast, most stocks, bonds, and other forms of paper investment have a maximum capital gains tax rate of 20%, making them potentially more lucrative than gold when you realize the returns. However, the higher rate applied to precious metals is seen by many as a price worth paying for the extra stability the long-term investment has historically offered.
But unfortunately, this isn’t the end of the gold and silver tax story. Buying precious metals can also attract a sales tax depending on your location, which can significantly add to the purchase cost when you make your first investment.
How States Charge Sales Tax on Gold and Silver
Each state is free to set its own sales tax rate across the board or to have none at all, and it can also set its own range of products that are exempt from the basic tax. Many states have granted exemptions for precious metals bought as investments, transactions over a certain amount, or purchases of metal above a certain purity level.
Because of this, it’s important to check the specific rules for your state, taking into account the type of gold investment you’re planning, so you can find out what extra tax charges may be added to your transaction total.
Why Many States Are Removing Gold and Silver Sales Tax
The gold and silver sales tax situation is complex and can frequently change state by state, but recently, more states have begun removing sales taxes on investment-grade gold and silver completely. Here’s why.
States Don’t Charge Sales Tax on Other Investments
The original reason for states applying a sales tax to precious metals was that, unlike many other kinds of investment, gold and silver are real-world materials that are physically bought and sold. The argument is that this makes buying them the same as any other consumer purchase, and so a sales tax is natural and expected.
However, states don’t levy a sales tax on most traditional paper investments such as stocks, bonds, or financial instruments, so why should precious metals be any different? By removing the sales tax from investment-grade gold and silver, states are simply recognizing the special savings-friendly status of bullion compared to regular consumer goods.
Taxing Precious Metals Reduces a State’s Tax Revenue
A sales tax on precious metals may seem a straightforward way to increase a state’s revenue, but there’s solid evidence that imposing one actually has the opposite effect. A sales tax discourages trading in precious metals, reducing its economic activity, from metal brokering businesses to conventions and more.
A Michigan investment analysis found that the overall reduction in state revenue outweighed the potential sales tax take, and the effect was most significant in states with competition from a tax-free neighbor.
A Sales Tax Discourages Prudent Investment Strategies
Most buyers of precious metals work on a relatively small scale, investing incremental amounts over many years as part of a balanced long-term savings plan. Gold and silver, in particular, are seen as safe havens that are relatively immune to market variation, and encouraging people to invest in them is a benefit to the overall stability of the economy.
Imposing a sales tax effectively punishes a state’s citizens for following a prudent and diversified investment strategy and actively promotes riskier methods of long-term saving.
Sales Tax On Gold And Silver by State
There are two important things in addition to your state’s sales tax on gold and silver. First, while the state sets the underlying tax rate, each city or county may add an extra point or two on top. Second, in states where no sales tax is charged on bullion investments, a levy might still apply on certain coins, collectibles, and other items with a value beyond their pure precious metal content.
It’s essential to check your city, county, and state tax rules to be 100% certain. Now that you know how sales tax works for gold and silver, here are the state-by-state rates.
List of Sales Tax Rules State By State
In the list below, any figures shown are for the state-wide rate and are the minimum you can expect to pay. These do not include any county-specific tax rates.
- Alabama: No sales tax on bullion
- Alaska: No sales tax at a state level
- Arizona: No sales tax on bullion
- Arkansas: 6.5% on all precious metal sales
- California: 7.5% on transactions below $1,500
- Colorado: No sales tax on most precious metals
- Connecticut: 6% on purchase values below $1,000
- Delaware: No sales tax
- Florida: 6% on values below $500, with an exemption for legal tender
- Georgia: No sales tax
- Hawaii: 4% general excise tax paid by the seller, often added to the purchase price
- Idaho: No sales tax
- Illinois: 6.25% on South African Krugerrands only, all other bullion is exempt
- Indiana: No tax on high-purity bullion, 7% on other types of precious metal
- Iowa: No sales tax
- Kansas: No sales tax
- Kentucky: 6% on all orders
- Louisiana: No tax on precious metals
- Maine: 5% flat rate
- Maryland: 6% on order values below $1,000
- Massachusetts: 6.25% on transactions below $1,000
- Michigan: No sales tax on high-purity bullion
- Minnesota: 6.88%
- Mississippi: 7%
- Missouri: No sales tax on high-purity bullion
- Montana: No sales tax
- Nebraska: No sales tax
- Nevada: 6.85% with some exemptions
- New Hampshire: No sales tax
- New Jersey: 7%
- New Mexico: 5% paid by the seller
- New York: 4% on transactions below $1,000
- North Carolina: No sales tax
- North Dakota: 5%, but with high-purity bullion exempt
- Ohio: Basic sales tax of 5.75% applies to silver and gold bezels, high-purity bullion is exempt
- Oklahoma: No sales tax on precious metals
- Oregon: No sales tax on any precious metals purchase
- Pennsylvania: 6% on silver and gold coins which are not legal tender, bullion is exempt
- Rhode Island: 7% tax applies only to bullion that’s not been refined or smelted
- South Carolina: Most precious metals are exempt, but some coins and processed items attract 6%
- South Dakota: No sales tax on investment-grade bullion or legal tender
- Tennessee: No sales tax on gold or silver bullion
- Texas: No sales tax on gold or silver bullion
- Utah: A 4.75% tax applies to bullion with purity below 50%
- Vermont: 6% on all precious metal transactions
- Virginia: 5.3% levied on all precious metals with no exemptions
- Washington: No tax on any non-collectible precious metals
- West Virginia: Investment-grade bullion and coins are tax-exempt
- Wisconsin: A 5% tax on all precious metal purchases
- Wyoming: A basic 4% rate on all precious metal purchases
Invest in Gold and Silver Using A Tax-Advantaged IRA
If you’re considering investing in gold or silver, a gold-backed IRA is an excellent way to buy precious metals in a tax-advantaged way.
Gold and silver remain two of the safest long-term investments available, historically providing a reliable hedge against economic instability. But simply trading precious metals on the open market can quickly become costly once fees, commissions, sales tax, and capital gains taxes are added to the mix.
If you’d like to know more about opening a gold IRA with Noble Gold Investments, call us today to learn more and explore your options.