The tax implications of investing in precious metals can be assessed in several ways, each of which can have an impact on the net-profit an investment makes. These ways include the holding or sale of precious metals as 1) tangible property and intangible property, 2) capital gains, and 3) personal business.
This article will discuss these means by which precious metals can be taxed, the situations in which the tax applies, and the levels at which each method of taxed is implemented. There are also methods and financial instruments that may avoid or reduce taxation of precious metals, back room estate sales excluded. These techniques will be elaborated upon in the 4th part of this article.
Taxation of tangible and intangible property
Precious metals are considered tangible property rather than real property. Thus in some cases, the ownership of precious metals such as gold, platinum, titanium, and silver may or may not carry property related tax. The U.S. Federal government does not tax ownership of tangible property in the form of precious metals until they are sold and/or income is received in relation to them. However, some U.S. States such as Georgia, do tax ownership of personal precious metals. Some States that do not tax ownership of precious metals are Delaware, Pennsylvania, and Hawaii,
Taxation of capital gains
Proceeds from the sales of precious metals are taxable as income when those proceeds yield a profit from the original price after qualified cost basis adjustment. Not only are the sale of precious metals made for investment taxable as a capital gain on intangible property, they may also be taxable as income from sale of collectible assets, which for all but the lowest income tax bracket is equal to or higher than the maximum long term capital gains tax. This means that sales of Gold funds could end up taking 28% off your capital gains instead of 15%.
Taxation through 'pass through' business
Sole proprietorships, S-Corporations and Partnerships all receive flow through income on individual tax returns. This means end of tax year retained income from a gold collectibles dealer structured as sole proprietor or S-Corporation would be passed through onto the individual owners' 1040 tax returns as income.
This income is then subject to normal deductions and exemptions and then taxed at the income tax bracket rate in which the individuals' taxable income validates. Additionally, a minority portion of U.S. States assess tax on business inventories. In such cases the inventory tax is assessed via that State's taxation method.
Tax free, reduced, and deferred precious metals
There are a few ways to avoid or defer tangible property tax, tax on the sale of precious metals and income related to such. These methods include 1) conversion, 2) reallocation 3) exchange and 4) cost basis adjustment and expensing.
• Conversion
This means precious metals crafted into items such as tea-pots, jewelry, silverware etc. qualify as personal adornments and household items thus avoid being taxed as personal property even in States that do tax tangible property.
• Reallocation
The placement of intangible precious metal assets such a precious metals fund, in a tax-deferred instrument such as an I.R.A., or a tax free instrument such as a foreign company trust. When these assets are bought and sold they then may either defer income tax or avoid taxation so long as specific income is not brought into the United States. For example, a precious metals mining company that issues shares on a foreign exchange and is traded on that exchange through a foreign company trust, will not be taxed in the U.S. until that income is received within the U.S.' taxable jurisdiction.
• Exchange
Similar to barter where what is traded cannot be taxed as a sale because nothing is sold. Barter can be used to exchange for an item of higher value or higher potential appreciation thereby deferring taxation until that new item is sold.
• Expense accounting
Recoding the purchase of precious metals as an expense rather than a credit to a cash account may make a lower taxable income possible at the end of the tax year. This technique requires the use of a third party source of financing such as a private lender. Provided the source of financing has a lower cost in regard to the profit made from both the sale of the precious metal and the tax on such, then this method may be advantageous.
For example, company A purchases $10K of gold collectible coins with financing from Company B at 4%. After the tax year ends, the business sells the gold for a profit of 10% and pays off the loan half way through the loan's term. The loan ends up costing 2% due to early payoff, the profit becomes 8% and the tax on the gold's sale for that year is 0%, and annual income tax is reduced due to the financing expense.
This article will discuss these means by which precious metals can be taxed, the situations in which the tax applies, and the levels at which each method of taxed is implemented. There are also methods and financial instruments that may avoid or reduce taxation of precious metals, back room estate sales excluded. These techniques will be elaborated upon in the 4th part of this article.
Taxation of tangible and intangible property
Precious metals are considered tangible property rather than real property. Thus in some cases, the ownership of precious metals such as gold, platinum, titanium, and silver may or may not carry property related tax. The U.S. Federal government does not tax ownership of tangible property in the form of precious metals until they are sold and/or income is received in relation to them. However, some U.S. States such as Georgia, do tax ownership of personal precious metals. Some States that do not tax ownership of precious metals are Delaware, Pennsylvania, and Hawaii,
Taxation of capital gains
Proceeds from the sales of precious metals are taxable as income when those proceeds yield a profit from the original price after qualified cost basis adjustment. Not only are the sale of precious metals made for investment taxable as a capital gain on intangible property, they may also be taxable as income from sale of collectible assets, which for all but the lowest income tax bracket is equal to or higher than the maximum long term capital gains tax. This means that sales of Gold funds could end up taking 28% off your capital gains instead of 15%.
Taxation through 'pass through' business
Sole proprietorships, S-Corporations and Partnerships all receive flow through income on individual tax returns. This means end of tax year retained income from a gold collectibles dealer structured as sole proprietor or S-Corporation would be passed through onto the individual owners' 1040 tax returns as income.
This income is then subject to normal deductions and exemptions and then taxed at the income tax bracket rate in which the individuals' taxable income validates. Additionally, a minority portion of U.S. States assess tax on business inventories. In such cases the inventory tax is assessed via that State's taxation method.
Tax free, reduced, and deferred precious metals
There are a few ways to avoid or defer tangible property tax, tax on the sale of precious metals and income related to such. These methods include 1) conversion, 2) reallocation 3) exchange and 4) cost basis adjustment and expensing.
• Conversion
This means precious metals crafted into items such as tea-pots, jewelry, silverware etc. qualify as personal adornments and household items thus avoid being taxed as personal property even in States that do tax tangible property.
• Reallocation
The placement of intangible precious metal assets such a precious metals fund, in a tax-deferred instrument such as an I.R.A., or a tax free instrument such as a foreign company trust. When these assets are bought and sold they then may either defer income tax or avoid taxation so long as specific income is not brought into the United States. For example, a precious metals mining company that issues shares on a foreign exchange and is traded on that exchange through a foreign company trust, will not be taxed in the U.S. until that income is received within the U.S.' taxable jurisdiction.
• Exchange
Similar to barter where what is traded cannot be taxed as a sale because nothing is sold. Barter can be used to exchange for an item of higher value or higher potential appreciation thereby deferring taxation until that new item is sold.
• Expense accounting
Recoding the purchase of precious metals as an expense rather than a credit to a cash account may make a lower taxable income possible at the end of the tax year. This technique requires the use of a third party source of financing such as a private lender. Provided the source of financing has a lower cost in regard to the profit made from both the sale of the precious metal and the tax on such, then this method may be advantageous.
For example, company A purchases $10K of gold collectible coins with financing from Company B at 4%. After the tax year ends, the business sells the gold for a profit of 10% and pays off the loan half way through the loan's term. The loan ends up costing 2% due to early payoff, the profit becomes 8% and the tax on the gold's sale for that year is 0%, and annual income tax is reduced due to the financing expense.
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