Gold’s surge draws ETF investors, but unexpected taxes may apply. Here’s what you need to know

Gold has been on a blistering run, and ETF investors are rushing to grab a piece.

The metal has skyrocketed nearly 60% in the past year, climbing from $2,638 to more than $4,200 per ounce (1), far outpacing the S&P 500’s roughly 13% gain. (2)

With central banks hoarding bullion, retail investors flooding in, and analysts projecting gold could hit $5,000 by 2026, the frenzy is only intensifying. (3)

For anyone watching the rally from the sidelines, gold ETFs look like the easiest on-ramp. They trade like stocks, don’t require storing bars in your basement, and promise instant exposure to one of the hottest assets of the year.

But as more Americans chase performance, a critical detail is getting lost: a gold ETF isn’t always taxed like an S&P 500 ETF, and choosing the wrong one can quietly wreck your returns.

Here’s what you need to know about this form of investment as interest in gold investing hits a new high.

The appeal is obvious. When rate cuts appear on the horizon — and the Federal Reserve’s latest 25-basis-points cut was hotly anticipated (4) — gold tends to shine.

Lower interest rates make non-yielding assets like gold more attractive, and that dynamic has pushed even more money into gold ETFs.

ETF providers have benefitted from both the demand and the story. Products like SPDR Gold Shares (GLD), the industry’s largest physical-backed gold ETF with more than $140 billion in assets (5), let everyday investors buy slivers of gold without needing to touch a single ounce.

Even so, experts warn that gold’s ride is rarely smooth. “It’s going to bounce up and down, and it’s not always going to work in your favor,” Morningstar’s Dan Sotiroff told CNBC. (6)

Advisors also emphasize moderation. Many recommend that gold make up no more than 5-10% of a portfolio (7), noting that the shiny metal tends to dramatically underperform stocks and bonds over long periods — a small annual difference that compounds into a big drag over decades.

Still, that hasn’t stopped investors from pouring in. And that’s exactly where the tax traps are sprung.

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Many investors assume that anything purchased through a brokerage account gets standard capital gains treatment. But gold ETFs operate under different sections of the tax code (8), and the rules can get complicated fast.

The biggest misunderstanding comes from physical gold ETFs structured as grantor trusts. These funds hold gold bars in a vault and issue shares that represent slices of those bars. But because the IRS treats investors in grantor trusts as if they personally own the gold, these ETFs fall under the tax rules for collectibles.

That means even long-term gains get taxed at up to 28%, not the usual 0%, 15%, or 20% you’d expect from an equity ETF. Investors in high tax brackets often get hit with that maximum rate. (8)

Other products come with their own twists. Futures-based gold ETFs, such as Invesco’s DB Gold Fund (DGL), don’t hold physical metal. Instead, they use derivatives, which triggers the IRS’s “60/40 rule.”

In practice, that means 60% of any gain is taxed as long-term capital gains and 40% as short-term ordinary income, no matter how long you’ve held the fund. You could hold the ETF for 10 years and still face the same blended tax treatment.

Then there are ETNs, or exchange-traded notes (9), which track gold’s price but behave more like debt instruments. Gains on gold ETNs sold before maturity are typically treated as capital gains (potentially qualifying for long-term capital gains rates if held over one year), and not as ordinary income, though tax treatment can vary by specific ETN structure and issuer.

Despite the pitfalls, gold can still play a role in a balanced portfolio as long as you approach it strategically.

One of the simplest ways to sidestep tax headaches is to hold gold ETFs inside a retirement account, such as a 401(k) or IRA. Because gains aren’t taxed annually in these accounts, the collectible rules and 60/40 futures rules become irrelevant.

An IRA can neutralize the tax disadvantages that make gold more expensive to hold in a taxable brokerage account.

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Kitco (1); (2); Discovery Alert (3); Trading Economics (4); American Association of Individual Investors (5); CNBC (6); CBC News (7); Fidelity (8); Corporate Finance Institute (9).

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.