Gold is commanding a price close to double what it was barely three years ago, which has made gold exchange-traded-funds a trendy choice with investors lately. But on the heels of this gold rush may come a cash cow for the government as well, hitting an unsuspecting investor with a hefty gold ETF tax bill.

An investor holding shares in a gold or silver backed ETF, or other precious metals for that matter, is considered to own collectibles, not capital assets. These investments, if sold or held for more than a year, are taxed at a maximum rate of 28 percent. Also, if the ETF sells some of its metal, let’s say to pay expenses, the investor is also held accountable for any gains or losses from the sale. This should be reported to the Internal Revenue Service as part of gross income, regardless of whether or not a cash distribution was received.

Any trustworthy gold ETF, nevertheless, will show its shareholders how to compute gains or losses when the ETF sells inventory. Contact the company or check its Web site for more information.

The good news for shareholders is that game rules appear to change when a gold ETF fund is held in a retirement account. Where collectibles, such as coins or the metal itself, are not permitted in an Individual Retirement Account or 401(k) plan, the IRS relaxes the strings a little where precious metals ETFs are concerned. To play it safe, talk with your tax preparer, the company issuing the ETF, or the IRS for the straight policy.

With gold rallying and no end peak in sight, a gold ETF still looks like a smart move for a diversified portfolio despite paying a higher tax percentage. Being informed of the tax laws is also a smart move, for any investment.