By Terry Hanlon
Savvy investors know that owning precious metals can provide a de facto insurance policy for balanced financial portfolios. History shows precious metals, whether in physical or ETF form, operate as the ultimate hedge against inflationary concerns. But in owning precious metals, investors also need to know how and when to report their tax liability to the IRS. Tax season is upon us, and if investors have participated in one of the many variations of investing in precious metals, they’ll need to know how the IRS taxes them. International wholesaler Dillon Gage Metals provides a precious metals tax primer for review:
Capital Gains Tax
Monetary gains from physical gold or silver and gold and silver Exchange Traded Funds (ETFs), held outside an individual retirement account, are taxed as collectibles, similar to the categories of art and antiques. Precious metals bullion coins and bars are viewed as collectibles by the IRS, even though their value for tax purposes is based on their metal content and not their rarity or design. These tax implications come into play at the time of liquidation, or an event that transfers ownership.
Gains from the sale of physical bullion, collectibles and precious metals-backed investments are taxed as ordinary income if they're held for less than 12 months. Treatment by the IRS changes when either form is kept for a longer period, however. Gains on most investments maintained for over a year are taxed at a maximum rate of 20 percent, but collectibles can be taxed at up to 28 percent. So, if an investor’s precious metals holdings are more than a year old, gains realized at the time of sale could be taxable up to 28 percent. Additionally, a 3.8 percent net investment income tax may also apply.
ETFs and ETNs
Gold ETFs are backed by physical bullion. Treatment of an ETF by the IRS depends on how much of the fund is invested in physical gold. Gold Exchange Traded Notes (ETNs) are debt instruments, with the rate of return tied to a gold index. ETNs are taxed for either short- or long-term gains. When gold prices are rising, taxpayers typically receive a higher, after-tax return on gold held in an IRA than in an ETF or brokerage account.
Coins and IRAs
Since federal restrictions on gold ownership, imposed in 1933, were lifted in 1975, U.S. investment opportunities have grown considerably. The Taxpayer Relief Act of 1997 broadened the investment opportunities even further, allowing IRAs to include one, one-half, one-quarter or one-tenth ounce U.S. gold coins and one-ounce silver coins minted by the U.S. Treasury Department, along with certain other coins and bars that meet minimum purity and minting requirements. Today, IRAs can invest in IRS-permitted gold, silver, palladium and platinum, whether in bullion bars or coins. Gold is typically the preferred metal in IRAs. As for other fairly common coin purchases, investors hold American Gold Eagles and Silver Eagles in IRAs, along with Canadian Gold Maple Leafs, Austrian Gold Philharmonics and Australian Gold Kangaroos.
Investor funds can be directly contributed or rolled from a traditional IRA or 401 (k) into a self-directed IRA. While precious metals IRAs can be advantageous, some restrictions do apply. An IRA owner can't maintain physical possession of his gold, however it can be held in the investors’ name with a trustee. For this service, trustees charge storage and administration fees.
Self-directed Roth IRAs can also invest in coins and bullion, so long as they meet IRS requirements.
As a leading wholesaler, Dillon Gage Metals offers clients a range of products that meet IRA rules. With storage facilities inNew Castle, Del., and outside Toronto, Canada, Dillon Gage Metals’ subsidiary, International Depository Services, can assist IRA administrators and investors with the storage of physical metals for IRA accounts. Dillon Gage Metals also offers wholesalers a streamlined way to manage and track customers’ precious metals retirement accounts with its proprietary platform, FizTrade.com.
Taxpayers report gains from selling precious metals on Form 1040, Schedule D. Any losses from selling these metals are reported on Schedule D and are used as a tax deduction. ETFs provide taxpayers with1099 forms to report their short-term or long-term gains or losses.
Gold reached a record $1,895 an ounce in September 2011, but has retreated since. However, a recent spike in investor interest has the precious metals industry poised for what may be a strong rebound. Investors pay taxes on selling gold only if they make a profit. For further information, please ask your tax professional or visit the Internal Revenue Services’ online library of capital gains taxation information.
This editorial was meant to provide tips for the proper compliance of tax liability with precious metals holdings. As with any tax preparation, you should always check with qualified tax professional or a licensed CPA to ensure the accuracy of your return before filing.
Terry Hanlon is the president of Dillon Gage Metals, a Dallas, Texas-based international precious metals wholesaler.