How Are Taxes on Commodities Handled?

Investing in commodities involves navigating a distinct set of tax rules. For tax purposes, “commodities” can refer to a wide range of assets, from agricultural products and energy resources to precious metals. The way an investor gains exposure to these assets—whether through futures contracts, direct physical ownership, or specialized investment funds—dictates how profits and losses are taxed.

The tax treatment for commodities differs from that of more common investments like stocks and bonds. These regulations mean that two different investments in the same underlying commodity, such as gold, could be subject to entirely different tax rates and reporting requirements.

Tax Treatment of Section 1256 Contracts

A significant portion of commodity trading occurs through instruments known as Section 1256 contracts. As defined by the Internal Revenue Code, these include regulated futures contracts, foreign currency contracts, and nonequity options. These financial products are subject to two key concepts: the mark-to-market rule and the 60/40 split.

The mark-to-market rule requires that all open Section 1256 contracts be treated as if they were sold at their fair market value on the last business day of the tax year. This means traders must recognize gains or losses annually, even on positions they have not yet closed. A benefit of this system is that the wash sale rules, which disallow losses on sales of securities when a substantially identical security is purchased within 30 days, do not apply to Section 1256 contracts.

The second component is the 60/40 rule, which governs the character of the gains and losses. All capital gains and losses from these contracts are treated as 60% long-term and 40% short-term, irrespective of the actual holding period. For instance, a trader with a $10,000 net gain from futures trading would treat $6,000 as a long-term capital gain and $4,000 as a short-term capital gain. For an investor in the highest tax bracket, whose short-term gains are taxed at 37%, the 60/40 rule results in a blended maximum rate of 26.8%.

Taxation of Physical Commodities and Collectibles

Owning commodities directly, such as holding gold bullion or silver coins, results in a different tax outcome compared to trading futures contracts. The gain or loss is calculated as the difference between the selling price and the owner’s basis, which is typically the purchase price plus any associated costs. If a physical commodity is held for one year or less, the profit from its sale is considered a short-term capital gain and is taxed at the individual’s ordinary income tax rate. If held for more than one year, the profit is a long-term capital gain.

However, the IRS places many physical commodities, particularly precious metals like gold, silver, platinum, and palladium, into a special category called “collectibles.” This classification also extends to assets like art, antiques, and rare stamps. While most long-term capital gains are taxed at preferential rates, long-term gains from the sale of collectibles are taxed at a maximum rate of 28%. For some higher-income investors, an additional 3.8% Net Investment Income Tax may also apply, meaning an investor could pay a higher tax rate on the long-term gain from selling gold bullion than they would on a similar gain from selling stock.

Tax Rules for Commodity Exchange Traded Products

Investors often use exchange-traded products (ETPs), such as exchange-traded funds (ETFs) and exchange-traded notes (ETNs), to gain exposure to commodities without holding futures contracts or physical goods. The tax implications of these products are determined by the ETP’s legal structure. The two most common structures for commodity ETPs are grantor trusts and limited partnerships, each with distinct tax consequences.

Many ETPs that hold physical commodities, especially precious metals like gold and silver, are set up as grantor trusts. For tax purposes, the IRS treats an investment in a grantor trust as if the investor owns a direct, fractional interest in the underlying physical commodity. Consequently, when an investor sells their shares in the ETP, the gains are taxed as if they sold a collectible, and long-term gains are therefore subject to the maximum 28% collectibles tax rate.

Other commodity ETPs, particularly those that gain exposure through futures contracts, are structured as limited partnerships. These partnerships are pass-through entities, so gains, losses, and other income items are passed through to the individual investors, who receive a Schedule K-1 each year detailing their share of the fund’s financial activity. The income passed through from these limited partnerships is subject to the same tax rules as holding futures contracts directly, meaning gains and losses are treated under the mark-to-market system and the 60/40 rule.

Reporting Commodity Gains and Losses

Gains and losses from Section 1256 contracts must be reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. This form is where the total net gain or loss from all such contracts is calculated for the year, including both realized and unrealized positions. After calculating the net gain or loss on Form 6781, the form applies the 60/40 split. The resulting 60% long-term and 40% short-term capital gain or loss figures are then transferred to Schedule D, Capital Gains and Losses.

For the sale of physical commodities, the transaction is reported directly on Form 8949, Sales and Other Dispositions of Capital Assets, which then flows to Schedule D. If the commodity sold is classified as a collectible and was held for more than a year, the gain is specifically noted and is subject to the 28% maximum tax rate.

Investors in commodity ETPs structured as partnerships will receive a Schedule K-1. This form provides the necessary figures, often already broken down into their short-term and long-term components under the 60/40 rule. The investor then reports these amounts on their tax return as directed by the K-1 instructions.