What are considered precious metals for investment purposes?
For investment purposes, precious metals are traditionally considered the chemical elements gold, silver, platinum and palladium. 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. 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, or by investing in the stock of companies that either invest in precious metals or produce them. Another way to invest in precious metals is to purchase precious metal ETFs (exchanged-traded funds).
In general, the IRS generally deems a precious metal asset investment a “collectible” and thereby a capital asset for income tax purposes. Hence, a net sale profit or loss is taxed as a capital gain or loss, and as either long-term or short-term. For long-term capital gains, the applicable tax rate in 2013 and beyond is based upon the ordinary income tax rate of the taxpayer. Further, for taxpayers with income in excess of $250,000 (joint returns) or $200,000 (single returns), the additional 3.8% investment income tax (the 3.8% net investment income tax, or NIIT) is added to the otherwise applicable capital gains rate.
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 silver bullion-type coins, 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.
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. Use of a qualified retirement plan vehicle for acquisition may or may not be appropriate and carries its own separate set of considerations and limitations. All these factors must be considered when making precious metals investments.
Can a taxpayer hold precious metals in an IRA?
The list of precious metals that may be held in an IRA is specific. Both life insurance and collectibles cannot be held in an IRA and, 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.” In effect, the transaction is treated as a premature taxable distribution. Therefore, investment assets in an IRA must be carefully selected, especially if they are precious metals.
Here are some examples of prohibited collectibles by the IRS: