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 11th article, we look at how sales of precious metals are taxed.
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.