More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
As part of AdvisorOne’s Special Report, 20 Days of Tax Planning Advice for 2013, throughout the month of March, we are partnering with our Summit Business Media sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format. In this 10th article, we look at the tax advantages of ETFs.
Q. When a precious metal is sold, how is the transaction taxed?
Unless a precious metal is part of a tax straddle owned by the investor, or is part of a conversion transaction, no special tax rules apply to its sale. Therefore, to the extent that the selling price received exceeds the individual’s tax basis in the metal, the individual must report a taxable gain; if the individual’s tax basis in the metal exceeds the selling price, he or she may report a loss from the transaction. Metal held as an investment is considered a capital asset, and gain or loss on the sale will be considered a capital gain or loss, subject, however, to the special rules for collectibles. Whether the capital gain or loss will be long-term or short-term depends on how long the investor owned the metal prior to sale.
When bullion-type coins are acquired in the ordinary course of a taxpayer’s trade or business, the taxpayer’s purpose for holding the coins at the time of their disposition (even if different from the taxpayer’s purpose in acquiring them) apparently controls for purposes of determining whether their sale results in capital gain (or loss) or ordinary income (or loss).
The sale of a precious metal that is part of a tax straddle is subject to special tax rules, as is the sale of a precious metal that was held as part of a conversion transaction.
Planning Point: In light of the likely change in taxation (as to deductions, ordinary and capital gain tax rates), and the new FICA tax imposed on certain investments held by certain levels of taxpayers that is slated to begin in 2013, sellers should carefully check to determine the current income tax impact of a proposed sales transaction. Some sales may also be preferable if executed before the end of 2012 rather than in 2013 (or later) for these same reasons, since they may generate less overall tax and therefore a larger net gain for an investor.
State Income Taxation: Some states (and local county and city governments) impose a separate state income tax on precious metal sales transactions. The rates and the tax treatment in the states vary widely by state, and the tax can be substantial depending upon the state in which the sale takes place. As of the date of this publication, those states that apparently do not impose an income tax on the sale are Alaska, Florida, New Hampshire, Nevada, Tennessee, Texas, South Dakota, Washington, and Wyoming (primarily because these states have no state income tax). Advisors need to check the impact of the applicable state capital gains taxation and other income tax regime at the time of proposed sale to assess the impact of such taxation on the sales transaction.
Taxation Inside Qualified and Nonqualified Plans:
IRA - Precious metals purchased by the custodian inside a self-directed IRA will be exempt from all capital gains taxes if sold inside the IRA by the custodian, since the transaction is generally exempt from income taxation. Precious metals for IRAs may be purchased only by the account custodian, except in instances of transfers of rollovers. All contributions must be made in cash.
401(k) - A qualified plan could provide for an account permitting plan participants to invest in precious metals on a pre-tax basis. Moreover, trading by the participant in such an account would be tax-deferred. However, the distribution would normally be payable in cash rather than in kind, and would thereby produce ordinary income rather than capital gain. Whether a distribution can be made in kind from a qualified plan appears in doubt. Therefore, with negative income tax consequences and technical issues, use of a qualified deferred compensation plan to acquire precious metals is generally not attractive, even in smaller companies for a sole participant.
Nonqualified Deferred Compensation Plan – A nonqualified plan could provide for an account permitting plan participants to invest in precious metals on a pre-tax basis. However, the sponsoring company must own the assets held in connection with the plan, and so would actually possess ownership of the metal. The precious metal account is a record-keeping, notional account only, even if the sponsoring company actually invests in those precious metals. Trading on the account (any account) is taxable (to the degree taxable) to the sponsoring company; not the individual participant. The participant never has, nor can have, any beneficial interest in the underlying account. Even if distributed in kind, the value at the time of distribution would be taxable as ordinary income to the participant, and not as a capital gain.
Planning Point: Therefore, satisfying the account liability owed a participant by the distribution of actual precious metal rather than cash has negative tax consequences and also raises potential ERSIA and income tax issues. Therefore, use of a nonqualified deferred compensation plan to acquire precious metals is not an attractive vehicle to purchase such metals.
For more tax stories and advice, check out AdvisorOne’s 20 Days of Tax Planning Advice for 2013 home page.