Keith Fitz-Gerald (Money Morning):
Millions of investors who bought gold in the last 12 months are undoubtedly very happy at the moment – considering that the yellow metal has risen 60% since last November to a recent close of $1,138.60 an ounce on Monday.

But chances are good that many won’t be smiling when they discover just what the taxman has planned for their gains.

Unbeknownst to most investors, gold is considered a collectible not a capital asset. In plain English, this means that despite the fact that many people believe they are investing in gold, the Internal Revenue Service (IRS) believes that they are collecting it.

This is no small distinction and hurts investors because it means that gold does not qualify for the 15% maximum tax bite that most of us employ as a matter of routine when we mentally calculate profits earned on investments held for more than a year. That 15% cut for Uncle Sam is the long-term capital gains tax rate that applies to most stock or mutual fund investments.

Precious metals are a completely different story. Profits from these “investments” can be subject to a 28% maximum tax rate if held for more than 12 months. And if they are sold in less than a year, the profits count as ordinary income.

The long and the short of it “is that as a result of gold’s spectacular run-up, many investors may have a tax problem they haven’t counted on when they go to sell,” said Gary E. Ham Jr., of the Oregon-based accounting firm of Jones & Ham PC

This may be especially true for investors who have piled into such asset-backed, exchange-traded funds (ETFs) as the SPDR Gold Trust (NYSE: GLD), the iShares Silver Trust (NYSE: SLV) and the iShares COMEX Gold Trust (NYSE: IAU), for example, because precious-metals ETFs are set up as something called a “grantor trust.” According to Barron’s, ETF investors are treated as owning undivided interests in the actual metal that’s owned by the fund. Therefore, when an investor sells shares in the ETF, the tax code treats that investor as having sold a share of the metal backing the fund.

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As you read what follows, keep in mind the following dictionary definition:

demagogue – noun, verb, -gogued, -goguing. 1) a person, esp. an orator or political leader, who gains power and popularity by arousing the emotions, passions, and prejudices of the people. 2) to treat or manipulate (a political issue) in the manner of a demagogue; obscure or distort with emotionalism, prejudice, etc.

It seems taxes have always been a sexy issue, at least for the last millennium since Lady Godiva, that notoriously anti-tax Anglo-Saxon noblewoman who – according to legend – rode naked through the streets of Coventry in England in order to gain a remission of the oppressive taxation imposed by her husband on his tenants.

Naked Demagoguery

From all historic accounts, at least Lady Godiva was sincere about her tax protest.

On February 17, 2007 when the junior senator from Illinois introduced his bill, the Stop Tax Haven Abuse Act, he issued a ringing statement in which he decried what he claimed was an annual loss of $100 billion due to alleged offshore tax evasion by Americans.

“This is a basic issue of fairness and integrity,” intoned then Senator Barack Obama. “We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren’t disadvantaged.” In his 2008 Presidential campaign, candidate Obama often repeated this theme to applause, promising to crack down on tax cheats.

Do As I say, Not As I Do

Fast forward to 2009. President Obama’s choice to be Secretary of the Treasury is the supposedly indispensable Tim Geithner (who?) – thus making a tax cheat/incompetent who owed about $120,000 in back taxes head of the Internal Revenue Service.

Asked about the propriety of nominating a Treasury secretary who was a major tax scofflaw, Obama characterized the eight-year tax evasion as “an innocent mistake.”

Than came ex-Health and Human Services nominee, ex-Senator Tom Daschle, who was forced to pay back almost $200,000 in taxes with interest (but no penalties) on the free car and driver he had been receiving from a Wall Street friend for the past three years. And there was Nancy Killefer, who withdrew her nomination for Obama’s chief performance officer, because she too owed back taxes.

Not to mention my former House colleague, Rep. Charlie Rangel (D-NY), who is embroiled in a controversy over non-payment of years of back taxes on unreported income from a beach front villa in the Dominican Republic. Don’t worry folks, Charlie only heads the House Ways and Means Committee that writes all the tax laws.

Dutch Treat

But this tax hypocrisy by politicians is not confined to this side of the Atlantic Ocean.

Leftist members of the Dutch Parliament are in full cry against Princess Maria Christina of the Netherlands, the youngest of four daughters of the late Queen Juliana of the Netherlands and her Prince consort Bernhard.

It seems that Princess Christina, who lives in London and also holds British citizenship, has been exposed as being the beneficiary of private foundations that act on behalf of members of the Dutch royal family, both registered in the Channel Island’s tax haven of Guernsey, where they enjoy legal tax exemption!

“Eh gad,” say the Dutch parliamentarians, “this must be investigated!” (Forget the fact that the Netherlands is possibly the world’s leading tax haven for offshore registration of corporations that bring in millions of tax dollars).

It is not enough that the Princess was forced by Dutch law to renounce her and her children’s rights to the throne before converting to Catholicism when she married a Catholic in 1975 without the permission of Parliament.

Although the Guernsey trusts are fully legal, MPs say Christina should act as a role model. “She should not be looking for financial loopholes to avoid paying the full amount of tax,’ Labour MP Diederik Samsom said. (Someone should investigate him!)

British Blather

And not be outdone in hypocrisy, in London the British Left is demanding the political scalp of one Glen Moreno, the chairman of the Pearson corporation, which owns the Financial Times, who was appointed as acting chairman of the government’s UK Financial Investments (UKFI) company last month. UKFI was set up to manage the billions of pounds of public money that is helping to keep troubled British banks afloat.

Moreno’s sin? Until last April he was a trustee of Liechtenstein Global Trust, where allegedly some British citizens had accounts that may have been used for tax evasion.

Give ‘Em a Hand

So I will again quote the late, distinguished Judge Learned Hand of the U.S. Court of Appeals in New York, who in a memorable tax case dissent, offered these timeless remarks, “There is nothing sinister in arranging one’s affairs so as to keep taxes as low as possible…nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions.” [IRS Com. v. Newman, 159 F2d 848, 851 (2nd Cir 1947)]

Source: A Taxing Situation