Sprott Physical Gold Trust ETF, a new alternative... maybe

[zoog]

The Sprott Physical Gold Trust started trading Friday on the NYSE as PHYS. (They say it will soon trade in Toronto as PHY.)

Jesse offers his musings, mostly wondering if the new fund is pushing the recent rise in gold price due to buying potentially tons of bullion for the fund: jessescrossroadscafe

This is an odd duck. It is listed as an ETF (like GLD), but operates more like a closed-end fund (like GTU or CEF). The tax considerations could be complicated.:confused: While they claim you'll only be subject to long-term capital gains, my understanding is that if it is listed as an ETF, then like GLD you will be subject to the 28% collectibles tax. More on the tax issues at seekingalpha.

The main buzz about this fund is about the apparent ability to redeem your shares in physical bullion. From the seekingalpha article:

PHYS does have a redemption feature, but it’s severely crippled. The PHYS redemption window is only open once a month, and it comes with a lag. Investors who want to redeem shares of the fund can submit a request to the company on the 15th of the month. If the redemption request is large enough (bigger than a single gold bar), the redemption will be processed at least in part for physical gold at NAV at the end of the month (13-15 days later). If you’re redeeming lots smaller than a physical gold bar or just want cash, you get dinged for at least 5 percent off of the value of the fund.

[CanuckinTX]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

Jesse posted again today that they have now bought almost 9 tonnes of gold. Their premium is also less than that on GTU.

I definitely find this investment option interesting especially from the tax standpoint if it turns out to be true. I had already cleaned out all my non retirement accounts of GTU and CEF because I didn't want the headache of the tax consequences.

Would love to hear what other iTulipers think of PHYS. I saw Jesse dipped his toe in and bought some earlier this week.

[alext]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

First time posting.

This ETF fund like any and all paper "ASSets" (stocks, mutual funds, bonds etc. etc.) can be summed up in just two words:

ASS wipe..........

and guess who the hole is??!!:rolleyes:

[raja]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

I had already cleaned out all my non retirement accounts of GTU and CEF because I didn't want the headache of the tax consequences.

What "headache of the tax consequences"?

You have to file a one-page form with the IRS to be able to claim the capital gains rate.

[raja]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

While they claim you'll only be subject to long-term capital gains, my understanding is that if it is listed as an ETF, then like GLD you will be subject to the 28% collectibles tax. More on the tax issues at seekingalpha.

I'm wondering why someone hasn't fought the IRS on the ludicrous claim that gold bullion is a "collectible"?

It's obviously not of artistic, historic or other non-monetary value like artwork or rare coins. It's no more a "collectible" than dollars in the bank. So how do they get away with this "collectible" tax rate?

[CanuckinTX]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

Well yes, it's not exactly like it's a huge deal but I'd just rather hold physical gold for my non-retirement accounts than trust my tax accountant and the IRS. I need some physical anyway so I figured it's just easier to not hold these ETF's in the taxable account.

[swannmex]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

http://www.sprottphysicalgoldtrust.c...n/default.aspx

Trading at a 4.85% premium to NAV as of yesterday's close.

[zoog]

Re: Sprott Physical Gold Trust ETF, a new alternative... maybe

I'm wondering why someone hasn't fought the IRS on the ludicrous claim that gold bullion is a "collectible"?

It's obviously not of artistic, historic or other non-monetary value like artwork or rare coins. It's no more a "collectible" than dollars in the bank. So how do they get away with this "collectible" tax rate?

Maybe the court costs trying to fight the federal government would end up costing more than the difference in tax rates?

I am not arguing with you that bullion as a collectible is dubious, but the IRS has held that position for a long time. Furthermore they are backed by the ideology of the fiat federal reserve note currency system; the government tries to discourage the use of gold as an alternative store of value. I haven't been able to find any specific historical info about when were precious metals first considered subject to that tax, but there is a "proposed regulations" memo including them in the list, with an effective date of December 31, 1981:
http://www.irs.gov/pub/irs-tege/reg408_10.pdf

At any rate, I looked into the tax considerations some more. Here is a relevant IRS memorandum from 2008:

http://www.irs.gov/pub/lanoa/pmta01809_7431.pdf

Thus, in the case of a "physically backed metal ETF" which is treated as a trust under § 301.7701-4(c), the investor is treated as owning an undivided beneficial interest in the collectible held by the trust. If the investor sells his interest in the ETF or the trust sells a portion of the collectible, the investor is treated as having sold all or a portion of his share of the collectible held by the trust and any gain from the sale of the trust interest or sale of the collectible by the trust is treated as collectible gain and subject to the maximum capital gain rate of 28%.

We note that "physically backed metal ETFs" are sometimes structured as trusts for federal tax purposes and that if a "physically backed metal ETF" is not structured as a trust or if the ETF does not directly invest in the metal, the above analysis does not apply. The structure of each "physically backed metal ETF" should be considered to determine the tax consequences of an investment in that ETF.

But, I suppose the Sprott Physical Gold Trust was not created as a trust under § 301.7701-4(c) because it was created as a trust in Canada, not the United States. The prospectus says:

The Trust will file an affirmative election with the Internal Revenue Service, to which we will refer as IRS, to be classified as an association taxable as a corporation for U.S. federal income tax purposes.

Specifically, according to the prospectus, under US regulations they are considered a Passive Foreign Investment Company. So just like GTU and CEF, as a US investor holding the fund in a taxable account, you would have to fill out IRS form 8621 (instructions) every year, claim the investment is a QEF (Qualifying Electing Fund), and

...include in gross income as ordinary income its pro rata share of the ordinary earnings and as long-term capital gain the net capital gain...

Ok, going back to the prospectus again:

An Electing Holder must report each year for U.S. federal income tax purposes his, her or its pro rata share of the Trust's ordinary earnings and the Trust's net capital gain, if any, for the Trust's taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from the Trust by the Electing Holder. A Non-Corporate Electing Holder's pro rata share of the Trust's net capital gain generally will be taxable at a maximum rate of 28% under current law to the extent attributable to sales of physical gold bullion by the Trust if the Trust has held the gold bullion for more than one year. Otherwise such gain generally will be treated as ordinary income.

If any holder redeems his, her or its units for physical gold bullion (regardless of whether the holder requesting redemption is a U.S. Holder or an Electing Holder), the Trust will be treated as if it sold physical gold bullion for its fair market value in order to redeem the holder's units. As a result, any Electing Holder will be required to currently include in income his, her or its pro rata share of the Trust's gain from such deemed disposition...

The way I read this is no matter whether or not you yourself sell your shares in the fund and redeem bullion or cash, if anyone else invested in the fund does so, then the fund sells bullion to cover that, and you get to pay your pro-rata share of taxes at 28% (or at your normal income tax rate if the fund held that bullion for less than a year before selling).

Other than that complication each year, when you do decide to sell your shares in the fund, and assuming you do not ask for physical bullion, then it does appear that the long-term tax rate would be 15% (assuming you held your shares for more than a year).

Such gain or loss will be treated as long-term capital gain or loss if the Electing Holder's holding period in the units is greater than one year at the time of the sale, exchange or other disposition. Long-term capital gains of U.S. Individual Holders currently are taxable at a maximum rate of 15%.

Note that I am not an accountant, tax attorney, or other qualified/liable individual.