Taxation of Precious Metals and IRS Requirements (before 10.01.2018)

 Taxation of Precious Metals and IRS Reporting Requirements

Tax laws are extremely complicated and difficult to understand. There are several types of taxes and it can be very confusing and stressful to know about them in detail. Same holds good for precious metals. They are subject to taxation in the majority of the countries, and since the tax laws are subject to frequent changes, professional assistance is encouraged before investing in precious metals. Some of the common questions people have regarding taxation of precious metals are "How are investments taxed?". Do you have to pay taxes on precious metals? How much are capital gains taxes? Do I have to report capital losses? We have tried our best to provide the current and up-to-date information on the taxation of precious metals in the USA in this article in simple words so that our readers can have a better understanding. Mainly there are two things an investor or collector does when it comes to precious metals; one is buying precious metals and the other is selling precious metals. Taxes are involved in both actions. First, let us talk about.

Taxes Involved in Buying Precious Metals:

Unlike many other countries, USA does not have any Goods Services Tax (GST), Value Added Tax (VAT), national tax, or other types of tax on purchasing precious metals. However, upon purchase of precious metals, there is only one type of tax in the USA and that is the state sales tax. Each state of USA has a different tax policy for purchasing precious metals. While some states of the USA charge sales tax, there are other USA states where sales tax is totally exempt on the purchase of precious metals. Then there are a few states which exempt the sales tax if the purchase of precious metals reaches a certain amount. We have given you the list of states that do and do not charge sales tax.

  1. States that do collect sales tax on bullion:

Alabama, Arkansas, Washington DC, Hawaii, Indiana, Kansas, Kentucky, Maine, Minnesota, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Tennessee, Vermont, Virginia, West Virginia, Wisconsin, Wyoming.

  1. States that do not collect sales tax on bullion :

Arizona, Delaware, Georgia, Idaho, Illinois, Iowa, Michigan, Mississippi, Missouri, North Dakota, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Washington.

  1. States that do collect sales tax on bullion, but have exemptions over a certain amount :

California ($1,500), Connecticut ($1,000), Florida ($500), Louisiana ($1,000), Maryland ($1,000), Massachusetts ($1,000), New York ($1,000), Texas ($1,000).

  1. States that vary based on city or county (no state tax):

Alaska, Montana, and Colorado.

For further details on sales tax for a particular state, you can go through our state pagesIf an individual is residing in a state where sales tax on  gold and other precious metal bullion is applicable but purchases precious metal bullion online from an out of state company, the company might not charge the individual with sales tax; however, the individual might be liable to pay a “Use Tax” to his or her state.

Taxes Involved in Selling Precious Metals:

  • What is IRS?

The full form of IRS is Internal Revenue Service and is a U.S. Government agency that was established in 1862 by President Abraham Lincoln. IRS is a bureau of the Department of Treasury, and its vital responsibilities are enforcement of tax laws and collection of taxes. It collects employment taxes, individual income taxes, and also handles corporate, excise, estate, and gift taxes.

  • What is Capital Gains?

Almost everything an individual owns for personal use: pleasure, as well as investment purpose, is considered as a capital asset. It could be home, furnishings, stocks and bonds, precious metals, etc. When an individual sells these capital assets and makes a profit (income), it is called as Capital Gains. You will be paying a federal tax for this profit or income. The gold, silver, and platinum and precious metal ETFs that are held outside of individual retirement accounts are treated as collectibles similar to that of artwork, wine, or cars by the IRS, and therefore are chargeable with Capital Gains Tax.

  • Short Term and Long Term Capital Gains

The investment held for a particular length of time decides the long term and short term capital gain. If the gains are made from the physical bullion, collectibles, and other precious metals-backed investment that are held for less than 12 months, they are Short Term Capital Gains. The gains made from those investments that are held for more than 12 months are known as Long Term Capital Gains. The short-term capital gains are taxed as ordinary income at regular tax rate. Most long-term capital gains are taxed at a maximum rate of 20%. However, collectibles can be taxed up to a maximum of 28% long-term capital gains. So, if precious metals are held for more than a year, the CGT can be a maximum of 28% and an additional 3.8% net investment income tax may also be applicable.

 

IRS Capital Gains Tax Rates

Tax Bracket

Capital Gain Tax Rate

Short Term

Long Term

10%

10%

0%

15%

15%

25%

25%

15%

28%

28%

33%

33%

35%

35%

39.6%

39.6%

20%

 

Except for the following types of assets:

Collectibles

Ordinary tax rates

28%

Depreciation recapture

Ordinary tax rates

25%

Qualified small business stock

Ordinary tax rates

28% after exclusion

 

Most forms of investment grade gold and silver come under the collectible category which include numismatic coins, precious metal bullion coins of all denominations, bars, wafers, commemorative coins, precious metal rounds, certificates, and certain ETFs.

There are three categories of Exchange Trade Funds (ETFs):

  • ETFs that are backed by physical bullion such as Gold ETFs that are structured as grantor trusts and the IRS treats them as collectibles.
  • Gold Exchange Trade Notes which are debt instruments and their rate of return is tied to a gold index and hence are taxed as short-term or long-term gains.
  • Closed-end funds are the third category which are also trusts and are treated as collectible

What is Capital Loss?

When a person sells a particular asset or investment like precious metals at a price less than s/he paid for, it is considered as Capital Loss. All capital gains have to be reported to the IRS. However, capital losses are deducted only on investment property and do not include property held for personal use. Similar to capital gains, capital losses are also categorized into short-term capital losses and long-term capital losses. A short-term capital loss occurs when an asset or investment is held for a year or less and sold at a loss. Any asset or investment that is held for more than a year and is sold at a loss will result in long-term capital loss. 

 How to Report Capital Lossand Capital Gains?

While filing a tax return, the taxpayer must clearly categorize all the gains and losses between long term and short term and aggregate the total amount for each of the four categories. Then the short term losses and gains are netted against each other and same goes for the long-term losses and gains as well. Finally, the net short-term gains or loss is netted against long terms gains or losses, and the final net number is then reported on the Form 1040. The gains and losses are to be reported on the Form 8949, which helps in providing a detailed information of capital gains and losses to the IRS so that it can compare that with the gains and loss reported by the investment companies and brokerage firms. The final net number from the Form 8949 are then transferred to the freshly revised Schedule D and then to the line 13 of Form 1040.

Precious Metals IRA Investing

The ban on owning gold that was imposed in 1933 was lifted in 1975, and thereafter, the Taxpayer Relief Act of 1997 led to great opportunities to invest in Precious metal IRAs, which are individual retirement accounts in which IRS approved physical precious metals are held in custody of a trustee for the benefit of an IRA account owner. A regular IRA holds paper assets while precious metal IRA holds physical bullion, coins, and bars. The Gold IRAs are usually self-directed IRAs where the custodian allows more diverse investments to be held in accounts. The Gold Self-Directed IRA can also include other retirement accounts like Roth IRAs, SEP IRA, SIMPLE IRA, HSA, Thrift Savings Plan (TSP), and 401(k)s.

There are certain Internal Revenue Service (IRS) tax rules that apply to the Gold IRA accounts.

  1. The IRS does not allow IRA to hold two main types of investments which are life insurance and collectibles. The IRS provides a list of collectibles that is prohibited in IRA accounts which include certain metals and coins, artwork, gems, antiques, stamps, and other personal property. Investing in the prohibited insurance and collectibles can attract a tax penalty.

  2. However, the IRS has few exceptions when it comes to collectibles. An IRA can hold one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. Since 1998, certain platinum and palladium coins and bullion can also be held in an individual retirement account. The details are given in the Internal Revenue Code section 408(m)(3)(A). To qualify for the IRA exceptions, the bullion and coins must meet the contract market standards set by the Commodity Exchange Act.

  3. The IRS requires all types of IRAs which also includes Gold IRAs to be in the possession of a third-party trustee or custodian and not with IRA owner. As per the IRS Publication 590, “The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.”

  4. Withdrawals as per the IRS rules can only be done after an individual has achieved 59.5 years of age. If it is done before the required age criteria, it can attract a 10% early withdrawal penalty, and there will be no tax advantage.

To help Americans have a well-planned retirement is the idea of the Individual Retirement Account, and if the account is withdrawn before its time, it does not serve the purpose.

Reporting to IRS 

Unlike other investments, investing in precious metals can be private and confidential; however, there are certain criteria where one cannot keep it private anymore and need to report it to the IRS. In this section, we will discuss the reporting requirements that the IRS expects from dealers as well as precious metal owners. These requirements are to curb money laundering or avoiding tax payments.

There are three different types of transactions that can take place and each has reporting criteria.

  1. Cash Transaction 

While buying precious metals, one need not worry about reporting it to the IRS, unless the transaction or transactions exceed $10,000 and actual cash is used to pay the amount by the person. Persons includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate. At such a time, the dealer is expected to file a Form 8300 (The Form 8300 requires details like name, address, citizenship, and social security number of the buyer) with the IRS along with reporting an SAR or IRS Suspicious Activity Report to the Financial Crimes Enforcement Network, a part of the U.S. Department of the Treasury as is required under the U.S. Patriotic Act as well as Anti-Money Laundering rules (AML). By cash it means the Federal Reserve notes and U.S. coins. 24 hours is the time window for the $10,000 sale. If two transactions happen within a period of 24 hours of each other, they are considered as related transactions.

Some Examples for filing the Form 8300 and reporting to IRS 

  • If an individual pays for the $10,000 or more single transaction in actual cash it is reportable.
  • If a person purchases $6000 worth of precious metals at a particular time of the day and makes the next purchase worth of $5000 after a gap of a few hours like 3 hours or 4 hours, then it is reportable.
  • If a bill is above $10,000 and a person makes payments with number of smaller money orders, then it is a reportable transaction.
  • If an individual makes a purchase of $14,000 and pays $9000 in cash and the remaining $5000 in cashier’s check it is a reportable transaction.
  • Also since husband and wife are considered as a same person by IRS for such transactions, if a transaction above $10,000 is split up for payment purpose by husband and wife, it is reportable.

Some examples where filing the Form 8300 and reporting to IRS is not necessary 

  • If an individual is paying the $10,000 or more through wires or checks, a dealer is not required to report this to the IRS as this transaction will already be on the bank record.
  • The IRS also states that if different items are purchased, they are considered as unrelated transactions.

If a person buys $8000 worth of gold or silver today and then again buys another $8000 worth of gold or silver after 48 hours, although it is not reportable, the IRS still sees at this transaction with suspicion.

When a precious metal held in IRA is sold, the custodian is required to report the IRS through the Form 5498 which reveals the yearly IRA investments of the account owner, which helps IRS track the basis of account owner and calculate the owing taxes at the time of withdrawal.

  1. Buying Precious Metals 

No reporting requirements are needed when buying precious metals. One can go ahead and buy a million Dollar worth of precious metals and they do not have to report. However, the person who sells it to you will need to report the transaction.

  1. Selling Precious Metals 

When a person is selling precious metals overseas, the law of the land applies to the sales of the precious metals. When a person goes to sell precious metals in USA, they are expected to report the profit to the IRS regardless of whether the buyer or dealer has any obligation of reporting it.

Dealer Reporting Requirements:

There are a few types of bullion products which when sold in certain quantities need to be reported to the IRS. The dealer will have to file an IRSForm 1099B to report the selling by the consumer. Similar to the Form 8300, twenty-four hours is the defined period of time for this transaction to take place. The 1099 IRS rule is only concerned with what a consumer sells and has nothing to do with any kind of purchase or the mode of payment for the purchase. The penalty for failing to file the Form 1099B can be around $50 whereas a failure to file the Form 8300 can be as high as $25,000, hence cash reporting is considered very serious by the government.

Based on negotiations it had with the IRS, a guidelines has been published by the International Council for Tangible Assets (ICTA) regarding the precious metals transactions that needs to be reported to the IRS.

The reportable items with its minimum finesse and minimum reportable amount has been given below 

  • Gold Bars with 0.995 fineness, any size bars totaling 1 Kilo (32.15 troy oz) or more
  • Silver Bars with 0.999 fineness, any size bars totaling 1000 troy oz or more
  • Platinum Bars with 0.995 fineness, any size bars totaling 25 troy oz or more
  • Palladium Bars with 0.9995 fineness, any size bars totaling 100 troy oz or more
  • Gold 1 oz Krugerrand as minted Twenty-five (25) 1 oz coins
  • Gold 1 oz Maple Leaf as minted Twenty-five (25) 1 oz coins
  • Gold 1 oz Mexican Onza as minted Twenty-five (25) 1 oz coins
  • U.S. 90% Silver Coins as minted; any combination of dimes, quarters, or half-dollars totaling $1,000 face value or more.

Before making any investment it is better to consult an accountant, who can guide you in an appropriate manner regarding diversifying your investment portfolio. Also they are professionals who will know about the tax rules in detail. If you have any doubts you can contact a tax professional to check about any particular rules and regulations.

The information given about precious metal taxes in this article is just a general guide and should not be misunderstood as tax advice. Seeking professional assistance is advised for any specific information regarding precious metal tax rules and regulations. Detailed information can also be found at www.irs.gov.