The Advisor's Professional Library

Precious Metal Taxation

March 4, 2013

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What are considered precious metals for investment purposes?

For investment purposes, precious metals are traditionally considered the chemical elements gold, silver, platinum, and palladium. These are classified for their unique characteristics, such as luster, resistance to tarnish or corrosion, chemical stability, and rarity. Apart from most all other elements, the "precious metals," like gold, silver, and to a much lesser degree platinum, are the most common hard asset investment options given their historical use as currency by nations. All four share the same properties that have made gold and silver especially desirable as money. Thus, these metals are highly sought after materials as stores of wealth that historically have held value over time against other forms of investments, and especially as compared to the value of paper currencies.

Investors can invest in precious metals both directly by purchasing the asset in the form of actual bullion or in coins, and indirectly by investing in the stock of companies that either invest in precious metals or produce them. This discussion focuses on direct investment in those assets commonly called precious metals in the form of bullion or coins, since stock and similar intangible business securities investments (for example, bonds) are handled in other questions.

Gold, silver, and platinum are the most common investment metals of the four, while palladium, being new to the investment metals market, currently has fewer investment options. For example, as of the date of this edition, US 1oz "Eagle" coins are available to investors in gold, silver, and platinum, but are not yet minted in palladium. Currently, the only "bullion-type" coin available in palladium is the Canadian Maple Leaf, although many private mints may stamp their own coins in palladium. Unlike some other investments, precious metals and coins generally have a high degree of investment risk, including loss of principal, and the markets can be very volatile and are currently largely unregulated.

In general, the IRS generally deems a precious metal asset investment a “collectible” capital asset for income tax purposes, and treats a sale profit as taxable either applying a flat or progressive tax rate that in 2012 can go to 28%.

However, as this discussion suggests, the taxation of the investment is an important consideration, but may be the lesser consideration in any decision in adding precious metal to an investment portfolio.

How may an individual invest in precious metals?

Depending on the metal, investments may be made in two or three ways. In the case of gold or silver, an investor may purchase gold or silverbullion-type coins (e.g., the Canadian Maple Leaf), bars, or certificates that certify that a specific amount of the metal is housed in a specific warehouse for the investor. In the case of other metals, such as platinum or palladium, investments are made by the purchase of bars or certificates.

Each method of investing in precious metals has its advantages and disadvantages.

If an investor acquires bullion-type coins in a taxable transaction (such as in a non-like-kind exchange or as payment of a stock dividend or for services rendered), the coins will be valued at fair market value, not face value, for purposes of that transaction.

IRA Purchase: According to the IRS, both life insurance and collectibles cannot be held in an IRA. According to the IRS, “if you invest your IRA in collectibles, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.”

Here are some examples of prohibited collectibles listed by the IRS in its website FAQ:

• Artwork,

• Rugs,

• Metals - there are exceptions for certain kinds of bullion,

• Coins - (but there are exceptions for certain coins),

• Antiques,

• Gems,

• Stamps,

• Alcoholic beverages, and

• Certain other tangible personal property.

Planning Point: Despite this seemly broad prohibition that looks to include precious metals, the exceptions available for precious metal collectibles permitted in IRAs are really rather broad and may be found in IRC Section408(m).

Advisors can check Publication 590, Individual Retirement Arrangements (IRAs), for more detailed information on permitted and prohibited precious metals “collectibles” in IRAs. Investors should always work with a an IRA administrator/custodian experienced with permissible Section 408(m)(3) precious metals to avoid adverse tax consequences to the plan, and its participants.

Pension Plan Purchase: The law currently allows a defined contribution 401(k) (and profit-sharing) qualified plan to invest in precious metals to the same extent permitted (and prohibited) under IRC Section 408(m). However, advisors must also consider the prohibited transaction rules in IRC Section 4975 and ERISA Section 406, the regulations under ERISA Sections 404(c) and 404(b) when using a defined contribution qualified plan. Defined benefit pension plans are also legally permitted to invest in precious metals as plan assets subject to the same Section 408(m) requirements imposed on permissible investments, but such investment generally makes little sense when there are plan benefits maximums allowed. Actually, as the IRS notes, “Although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments.” In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement (ERISA, § 404). In addition, certain rules apply to specific plan types. For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan. (ERISA §407) Certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors.[1]

In addition, under the Code, both participant-directed accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements.[2]

Planning Point: As a practical matter, a large corporate plan with lots of participants is unlikely to offer precious metals permitted under IRC Section 408(m)(3) as an investment in its “participant-directed”401(k) plan because of the complications for the trustee. However, for small business owners and professionals that can meet the qualifications to implement and use a so-called self-directed “solo 401K” (a one-person plan, or a precious metals IRA, (and perhaps even a small DB pension plan) precious metals might be purchased as a plan asset. However, even though some of these qualified plan vehicles may allow a pre-tax purchase of the investment, the vehicle itself generally comes with substantial rules and reporting requirements, and with distribution treatment of the investment from the plan that may make acquisition of the precious metal through one of these retirement plan vehicles less attractive than by individual purchase. No qualified plan approach to acquisition of plan-permissible precious metals should ever be attempted by an investor without professional legal and tax guidance.

In summary, each combination of metal and investment option carries certain advantages and disadvantages. Some precious metals may have more established markets. Other precious metals may have industrial purposes that can both hurt or help the value of the investment at any given moment, whether an investor is buying or selling in the market. All these factors must be considered when making precious metals investments.

[1] . Labor Reg. §2550.404c-1.
[2] . IRC Sec. 408(m).

What transactions of precious metals are reportable on an investing taxpayer’s income tax return for the sale year, including foreign tangible assets?

All sales of precious metals result in a reportable income tax transaction, as a gain or a loss, for federal income tax purposes in the year of a sale. They are similarly reportable for purposes of any applicable state income tax. This reporting on a personal income return is required whether the sales transaction is structured as a like-kind exchange or not, and whether or not it is a reportable transaction on Form 1099B by a dealer. Of course, any failure to report income for federal (and state income tax purposes where applicable) can result in civil and/or criminal tax penalties.

Specified foreign financial assets were first required by law to be report by U.S. individual taxpayers on Form 8938 (Statement of Specified Foreign Financial) as part of the 2011 Form 1040. 2011 Form 8938 required disclosure of (1) foreign deposit and custodial accounts and (2) other foreign financial assets. On June 7, 2012, the IRS released guidance for completing this requirement. It provided three major pieces of guidance on the reporting of specified foreign financial assets on Form 8938 as follows:

1)A foreign safe deposit box will not be considered a financial account;

2)Taxpayers who meet the minimum filing thresholds must report all specified foreign financial assets; and

3)Taxpayers with foreign tangible assets such as precious metals (e.g., gold) or tangibles such as jewelry, autos, antiques, and other collectibles will generally not be required to report those assets on Form 8938 if the assets are held directly, unless those precious metals or other tangible assets are held through “certificates issued by a foreign person, since the “the indirect ownership would be considered a specified foreign financial asset.

Are state sales taxes imposed on the purchase of precious metals?

State sales tax (local governments also) may be imposed on a purchase of precious metals, regardless of whether the form taken is pure bullion, bullion coins or numismatic coins. For example, California currently exempts only precious metals purchases in bullion and coin from California sales tax if the purchase is for more than $1,500 in-state (but does not currently cover the purchase of platinum bars), and also exempts all purchases of any size if the purchase is made from and delivered out-of-state (including platinum). State sales tax rules on precious metal vary greatly by state. Some states impose sales taxes on almost every type of transaction whether coins, paper, money, or bullion. These sales taxes can be substantial. Certain other states exempt large purchases, commonly about $1,000, or exempt some precious metals (or currency) purchases, and not others without any common logic for the differences. So, it is necessary and useful to ascertain whether your transaction will be subject to sales tax at the time of any purchase. Where state sales tax exemptions exist, it has been observed that the newest precious metal – palladium – and even platinum, are frequently not yet on the list of precious metals exempt from state sales tax.

How is an individual taxed if, instead of selling a precious metal, he or she exchanges it for other property?

Like-Kind Exchanges

If a precious metal is exchanged solely for another precious metal of the same nature and character (e.g., gold for gold, or silver for silver), the transaction will generally receive nonrecognition treatment, subject to the rules for like-kind exchanges in IRC Section 1031. Thus, the exchange of bullion-type gold coins minted by one country for bullion-type gold coins minted by another country will qualify as a like-kind exchange.[1]Similarly, the exchange of gold bullion for Canadian Maple Leaf gold coins (i.e., bullion-type coins) is a like-kind exchange.[2]

However, the exchange of a numismatic coin for a bullion-type coin is not a like-kind exchange.[3] Likewise, the exchange of gold bullion for silver bullion does not qualify as a like-kind exchange, since silver and gold are intrinsically different metals and are used in different ways.[4] (This reasoning would appear to apply to an exchange of any two different metals.)

Other Exchanges

If an individual exchanges a precious metal held as an investment for another precious metal of a different kind or class, or other property that is not a precious metal, the individual will recognize a taxable gain (or loss) to the extent that the sum of the fair market value of the property and money (if any) received in the transaction is greater (or less) than the tax basis in the precious metal transferred.[5] Normally, these will be capital gains and losses. Whether the capital gain or loss will be long-term or short-term depends on how long the metal had been owned. 

[1] .Rev. Rul. 76-214, 1976-1 CB 218.
[2] .Rev. Rul. 82-96, 1982-1 CB 113.
[3] .Rev. Rul. 79-143, 1979-1 CB 264.
[4] .Rev. Rul. 82-166, 1982-2 CB 190.
[5] .IRC Sec. 1001.

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