ETFs help you invest in gold. taxes can be the difficult part

For investors looking to add gold to their portfolio, exchange-traded funds offer an easy way to do so.

Always keep your expectations in check and know how it will affect your tax situation, experts say. Depending on the structure of the ETF, profits may be taxed at a different, and possibly higher, rate than expected. Gold can also be used as a store of value during market turbulence, but its price tends to fluctuate.

“The market will go up and down, and it won’t always work in your favor,” said Dan Sotiroff, senior analyst at Morningstar.

The value of one troy ounce (32.1 grams) of gold has soared over the past year, with the market closing price on Tuesday at $4,204, up nearly 60% from $2,638 a year ago. In comparison, Standard & Poor’s 500 Index The stock rose about 12.9% in that time to close at 6,829.37 on Tuesday. The price hike is believed to be due to a variety of factors, including increased demand from both central banks and retail investors, the latter of which includes investments through ETFs.

Some experts predict that the spot price of gold will reach $5,000 in 2026. If the Federal Reserve lowers its benchmark interest rate at next week’s meeting, it could attract more investors as gold tends to perform better in low interest rate environments.

Still, it’s usually a good idea to limit your investments to no more than 5% of your portfolio, said David Rosenstrock, a certified financial planner and director of financial planning and investments at Wharton Wealth Planning in New York. He generally does not recommend including gold in investment portfolios.

Over the long term, “gold tends to significantly underperform asset classes such as stocks and bonds,” Rosenstrock said. “Small percentage differences in annual returns may seem insignificant, but compounding over many years can have a big impact on your account balance.”

If you decide you actually want to invest in gold, ETFs allow you to do so without physically owning the gold yourself. Like all ETFs, they trade throughout the day like stocks. Most are passively managed, tracking the index and its performance, for better or worse.

These funds are also a small part of the ETF universe, with around a few dozen in existence compared to the total number of ETFs (more than 4,300), according to data from Morningstar Direct.

Some ETFs invest directly in gold bullion. Each ETF share represents a certain amount of physical gold. The largest of these is the SPDR Gold Share (GLD) has $140 billion in assets, Sotiroff said.

CFP Patrick Huey, owner and principal advisor at Victory Independent Planning in Naples, Florida, said if you invest in one of these ETFs through a taxable brokerage account, be aware that any gains you make on sale may be taxed differently than gains made in other investments such as stocks or bonds.

Short-term capital gains (profits earned on assets held for less than one year) are subject to ordinary income tax rates, ranging from the standard 10% to 37%.

However, even if you hold a gold ETF for more than a year, typical long-term capital gains tax rates (0%, 15%, or 20%, depending on your income) will not apply.

“From a tax perspective, (gold) is treated as collectibles by the IRS, so long-term gains are subject to tax rates of up to 28%,” Huey said.

This also applies to investing in gold through ETFs. Investors with income that falls into a higher tax rate will end up paying that tax rate.

You can also invest in gold through another type of ETF. An ETF that invests in gold futures contracts, such as the Invesco DB Gold Fund (ticker: DGL).

“Rather than holding physical gold, these funds use derivatives,” Huey said.

It would also result in unusual tax treatment. Generally speaking, returns on these gold futures ETFs are “governed by the IRS’ so-called 60/40 rule,” Huey said.

This means that regardless of the holding period of the ETF, those subject to long-term profits tax will apply to 60% of the profits and the regular tax rate will apply to 40% of the profits.

Another route to investing in gold through ETFs is the VanEck Gold Miners ETF (GDX).

“The basic idea is that this is an indirect exposure to gold. The returns to the mining operations are tied to the price of gold,” Morningstar’s Sotilov said.

However, he said prices tend to be “very volatile.”

“And you will be exposed not only to the yellow stone, but also to your business,” Sotilov said.

In other words, you are investing in a company. This means you need to be confident in the sector’s future profits and growth prospects.

For these gold mining ETFs, profits earned are taxed at normal short-term and long-term return rates.