Many investors prefer to possess actual gold and silver rather than ETFs that invest in these precious metals. While the tax consequences of owning and selling ETFs are obvious, few individuals completely comprehend the tax consequences of owning and selling real metal. The following describes how these investments are taxed, as well as their tax-reporting requirements, cost basis computations, and strategies to offset any tax obligations resulting from the selling of actual gold or silver.
Tax Implications of Selling Physical Gold or Silver
The Internal Revenue Service (IRS) considers physical holdings of precious metals such as gold, silver, platinum, palladium, and titanium to be capital assets specially designated as collections. Capital gains tax applies to holdings in certain metals, regardless of their form (bullion coins, bullion bars, rare coinage, or ingots). The capital gains tax is only levied following the sale of such assets and if the holdings have been held for more than a year.
While many tradable financial products, such as equities, mutual funds, and exchange-traded funds (ETFs), are subject to short-term or long-term capital gains tax rates, the sale of actual precious metals is taxed significantly differently. Physical gold and silver assets are subject to capital gains tax at your marginal tax rate, up to a maximum of 28%. Individuals in the 33%, 35%, and 39.6% tax categories pay just 28% tax on physical precious metals transactions. Short-term precious metals gains are taxed at regular income rates.
Tax responsibilities on the sale of precious metals are not payable at the time of sale. Sales of real gold or silver, on the other hand, must be declared on Schedule D of Form 1040 on your tax return. Form 1099-B must be reported to the IRS at the time of the transaction, depending on the kind of metal you are selling, since such sales are considered income. Items requiring such registration include $1,000 face value U.S. 90% silver dimes, quarters, or half dollars, as well as 25 or more 1-ounce gold Maple Leaf, Krugerrand, or Mexican Onza coins. Gold and silver bars weighing one kilogram or 1,000 troy ounces must also be registered. A Form 1099-B is not required for the selling of American Gold Eagle coins. The tax bill for all of these purchases is due at the same time as your regular income tax payment.
Cost Basis of Physical Gold and Silver
The amount of tax owing on the sale of precious metals is determined by the commodities’ cost basis. If you buy the metals yourself, the cost basis is the sum paid for the metal. The IRS does enable you to add some charges to your basis, which may lower your future tax obligation. Certain extras, such as appraisal fees, may be included.
For estimating the cost basis of actual gold or silver, there are two particular possibilities. To begin, if you get the metals as a gift, the cost basis is equal to the metals’ market value on the day the gifter acquired them. If the market value of the metals at the time of gifting is less than what the person donating them to you paid, the cost basis is equal to the market value on the day you receive the gift. In the second unique case, if you inherit gold or silver, your cost basis is equal to the market value of the metals on the date of death of the individual from whom you received them.
Tax Example and Offset Possibilities
Assume you bought 100 ounces of real gold today for $1,330 per ounce. You sell all of your gold holdings for $1,500 per ounce two years later. You pay taxes at a rate of 39.6%. The following situation takes place:
Cost basis = (100 x $1,330) = $133,000
Sale proceeds = (100 x $1,550) = $150,000
Capital gains = $150,000 – $133,000 = $17,000
Tax due = 28% (maximum percentage) x $17,000 = $4,760
Other collectable capital losses may be utilized to reduce a tax burden. If you sell silver for a $500 loss, for example, you may net these sums and owe just $4,260. You may also preserve the $500 as a loss carryover for the future.
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