Tax Implications of Trading Different PM Funds

[fusiforme]

Since I have been buying and selling some of these funds (at first without realizing different tax laws applied), I have been researching this topic and trying to get everything clear.

From what I have read so far, my understanding is that funds like GLD and SLV are taxed at the collectible rate of 28% if you hold them for over a year. However, if you are buying and selling them without holding longterm, then you just pay your regular short term capital gains rate on any profits, same as any other stock. Have I understood this correctly?

Then there are other sorts of funds that are classed as Passive Foreign Investment Corporations. This includes funds like PSLV and also closed end funds like CEF and ASA. The rules for investing in this sort of fund appear to be extremely burdensome and complicated, and after muddling through many many articles I thought I would never understand it. There are all sorts of details concerning making a QEF election, and the necessity of filing form 8261.

But then I came across an article which talked about a more recent amendment to tax laws for PFICs, stating that so long as you hold less than $25,000 of these kinds of funds in total in your accounts, and you have not made a QEF election, you simply pay your short term capital gains tax on any profits you have made from these funds, and are not required to file a form 8261 at tax time.


So my main concern here, as you may have gathered, is: can we buy and sell these different funds and cash in short term profits without ending up in a morass of tax complications as a result?

If anyone with more knowledge of the tax code than I have or more experience with these sorts of trades and investments could confirm these things for me, I would appreciate it.

Thanks.

 

[sprstpd]

I am not a tax expert. Consult a tax expert like Green Trader Tax if you want more definitive answers.

From what I have read so far, my understanding is that funds like GLD and SLV are taxed at the collectible rate of 28% if you hold them for over a year. However, if you are buying and selling them without holding longterm, then you just pay your regular short term capital gains rate on any profits, same as any other stock. Have I understood this correctly?

I believe that is correct.

Then there are other sorts of funds that are classed as Passive Foreign Investment Corporations. This includes funds like PSLV and also closed end funds like CEF and ASA. The rules for investing in this sort of fund appear to be extremely burdensome and complicated, and after muddling through many many articles I thought I would never understand it. There are all sorts of details concerning making a QEF election, and the necessity of filing form 8261.

But then I came across an article which talked about a more recent amendment to tax laws for PFICs, stating that so long as you hold less than $25,000 of these kinds of funds in total in your accounts, and you have not made a QEF election, you simply pay your short term capital gains tax on any profits you have made from these funds, and are not required to file a form 8261 at tax time.

I believe it is more nuanced than that after studying Form 8621 instructions:

https://www.irs.gov/pub/irs-pdf/i8621.pdf

Exception if aggregate value of shareholder’s PFIC stock is $25,000 or less.

A shareholder is not required to complete Part I with respect to a specific section 1291 fund if the shareholder meets the $25,000 exception on the last day of the shareholder’s taxable year. For purposes of determining whether a shareholder satisfies the $25,000 threshold, the shareholder takes into account all PFIC stock (QEFs, section 1291 funds, and PFIC stock subject to a section 1296 mark-to-market election) owned directly or indirectly other than PFIC stock owned through another U.S. person or PFIC stock owned through another PFIC. Shareholders filing a joint return have a combined threshold of $50,000 instead of $25,000 for purposes of this exception.

For more information, see Treasury Regulation section 1.1298-1T(c)(2).

The way I read this is you don't have to fill out Part I, but that doesn't mean you don't have to fill out other portions of that form.

Now, assuming that you buy a position in a PFIC and then sell it within the same calendar year (i.e., you have no position at year end), then I believe you do not have to file Form 8621 for that PFIC.

However, if you have a short-term capital gain on a PFIC but you hold it between two tax years, I think you would have to file Form 8621 (even if it was below $25,000) and if you wanted to make an election on that PFIC (like QEF or mark-to-market).

Note that one of the reasons for holding CEF in an account long-term is that if you make the QEF election, then you can get long-term capital gains rates when you sell, thereby getting more favorable tax treatment than GLD (a collectible). However, I have read some people who say that this isn't kosher and this loophole will be contested by the IRS. However, my reading of the tax law makes it seem as if the IRS would lose cases on this point if they contest. Doesn't mean I am right though.

As for Form 8621, it is a nightmare. But like anything, it can eventually be overcome. If you want to keep your taxes simple, avoid it. If you don't mind the extra complexity, it could save you some money in the long run assuming your investments work out.