Wednesday, November 18, 2009

BixTax Troubles for Holders GLD, USO, UNG and Other Commodity ETFs

Investors have been buying gold like hot bread this year, specially in the form of the much maligned GLD ETF. The GLD now reports holding 1,113 tons of gold.

U.S. Investors who bought GLD in January have made a return on investment of about 29.8% Investors in other countries have actually lost money, since the profits are due to the drop in the USD. You can see this on our site that tracks gold in other currencies. Here is the latest chart:

Not even those in the U.S. can claim such "positive" ROI. According to an article on MoneyMorning, Gold is considered a collectible, not a capital asset. This means that the IRS considers that investors are collecting it. This also means that gold does not qualify for the 15% maximum tax on profits earned on investments held for more than a year (the long-term capital gains tax rate that applies to most stock or mutual fund investments).

Profits from precious metals these can be subject to a 28% maximum tax rate if held for more than 12 months. And, even worse, they count as income if sold in less than a year.

We also track all gold and precious metals ETFs here.

According to the article, investors will have tax troubles on asset-backed ETFs like GLD, SLV and IAU), just to name a few, because they are a “grantor trust.” Barron’s says that ETF investors are treated as owning "undivided interests in the actual metal that’s owned by the fund". If an investor sells shares in the ETF, the IRS treats that investor as having sold a share of the metal backing the fund. When the ETF sells assets to pay expenses or management fees the resultant gains and losses flow directly through to investors and shareholders even if those investors don’t receive any distribution or cash at all.

Canadian investors have known similar problems for long time, with mutual funds that issue tax gains. Even if they hold the fund in December, they receive the gains for the entire year and are dinged badly for taxes.

Money morning lists other example of these problems with these ETFs:

"An investor who experienced a trading loss of $741 in the United States Oil Fund LP (NYSE: USO) – with no interest received – but a K-1 tax form reporting a taxable profit of $9,136 and interest of $210.
An investor who had actual trading profits in the United States Natural Gas Fund LP (NYSE: UNG) of $1,900, with no interest received, and a K-1 reporting taxable profits of $4,319 and $120 in interest.
An investor who had an enviable trading profit of $4,335 in the PowerShares DB Agriculture (NYSE: DBA), without receiving any interest – activity that triggered a K-1 form that reported profits of $6,963 and interest of $207.
An investor who notched trading profits of $337 and no interest in the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) triggered a K-1 listing profits of $3,406 and interest of $195. "

This will undoubtely give more ammunition to those against the GLD. Not all gold glitters equally.

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Please do your own due dilligence.

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