Does the IRS Know When You Buy Gold?
While most investors purchase gold for its financial benefits, they may be surprised to learn of its tax ramifications as well. The IRS taxes precious metals at up to 28% as collectibles – significantly higher than the typical 20% capital gains tax rate applied to most investments.
This article will present an in-depth examination of how to calculate your tax obligations when purchasing or selling gold coins.
Reportable Bullion Transactions
Bullion Exchanges’ reporting requirements for most coins and bars sold through Bullion Exchanges are minimal; however, certain coins fall under IRS jurisdiction and must be reported on a federal form upon sale. This includes gold bullion coins minted with fractional categories (1/10th, 1/4th or 1/2 ounce) as well as any US coin composed of 90% silver content.
As such, most of our customers do not need to worry about their privacy being breached by government reporting rules when buying bullion from us. If however, you have concerns regarding future taxes on capital gains it would always be prudent to consult a tax professional first.
Taxes on Capital Gains
Capital gains arise when you sell an investment for more than its cost basis, which typically includes your original purchase price plus costs such as commissions and improvements. Capital gains tend to be taxed at a lower rate than ordinary income.
Hold your investments for longer than one year to make long-term capital gains that are taxed at a reduced rate; any gains realized after this time period are taxed as ordinary income at a higher rate.
There are various reforms that could address the issues with current capital gains taxation. One fundamental approach would be indexing capital gains with inflation along with other forms of capital income and expense – this would reduce distortions, inconsistencies and sheltering. Another possibility is accrual taxation on marketable assets with retrospective taxation for non-marketable ones at death; Kamin and Batchelder estimate this combination could raise revenues by $400 billion even when limited only to households that earn at least $1 Million a year.
Reporting Requirements
The IRS mandates that precious metal dealers report sales exceeding certain thresholds in order to monitor large commodity exchanges and prevent money laundering. Dealers must also report any cash payments exceeding $10,000 received during transactions of over 10k each.
Gold’s tax liability largely depends on how long an investor holds it before selling, with longer-term gains typically being taxed at lower rates than shorter-term capital gains. Investors can reduce their tax liabilities through careful investment planning and holding their investments for longer.
Bullion bars and coins are considered investment assets by the IRS; jewelry however is classified as collectible. As such, investors should consult a qualified tax professional in order to understand their individual tax liabilities. A financial advisor can also assist investors in optimizing investments to minimize taxes while using 1031 exchanges to avoid paying any at all.
Reporting Cash Payments
According to federal anti-money laundering rules (which stem from the Bank Secrecy Act and USA PATRIOT ACT of 1970, as well as more recently from the Infrastructure Investment and Jobs Act passed in late 2021), any business receiving cash payments exceeding $10,000 must report them to the IRS on Form 8300. Cash is defined broadly, including United States currency as well as foreign country’s money orders, traveler’s checks, money orders and certain negotiable instruments; further, under new legislation the definition has been expanded to include virtual assets such as virtual currencies.
Law dictates that recipients of cash must report it, even if the total received is less than $10,000 or the transaction involves multiple separate transactions. While practitioners are unlikely to often become involved with cash reporting matters, helping clients establish procedures and controls can prevent unnecessary penalties that start at $500 for every instance of noncompliance and escalate significantly with repeated violations.
Categorised in: Blog