7686. When a precious metal is sold, how is the transaction taxed?Nuco Employeercline212014-05-27T19:02:00Z2014-05-27T19:02:00Z512697237Case Western Reserve University6016849014Site Map/Investments/Precious Metals and Collectibles/Precious MetalsTaxFactsDefaultArticle122131183-00-tf2.xml1183.00;#1923;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2When a precious metal is sold, how is the transaction taxed?32200.0000000000TaxFactsDefaultArticle2010-01-14T22:44:32ZSBMEDIA\moss-admin7686. 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 (see Q 521) 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 (see Q 526) subject, however, to the special rules for collectibles. See Q 7574 to Q 7575. 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. See Q 527. For the treatment of capital gains and losses, see Q 530. 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).See TAM 8413001.The sale of a precious metal that is part of a tax straddle is subject to special tax rules (see Q 7586 to Q 7602), as is the sale of a precious metal that was held as part of a conversion transaction. See Q 7603 and Q 7604.Planning Point: In light of the changes in taxation (as to deductions, ordinary and capital gain tax rates), and the new 3.8 percent investment income tax imposed on certain investments held by taxpayers with income in excess of specified threshold levels that became effective in 2013, sellers should carefully check to determine the tax impact of a proposed sales transaction. Some sales may now push the seller into higher tax brackets and therefore result in a smaller 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 – Certain permissible precious metals may be purchased by the custodian inside a self-directed IRA. They 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 (see Q. 7685 concerning roll-overs). All contributions to an IRA must be made in cash. Distributions can be taken in-kind subject to the prohibited transactions rules, and there is a 10 percent penalty for distributions taken prior to age 59½, and the Required Minimum Distribution rules (RMD rules) apply to IRAs beginning at age 70½. Therefore, the desirability of such an investment must be weighed in light of the often confusing permissible precious metals investment and prohibited transaction rules compliance requirements, along with the reporting requirements and certain recent federal government proposalsConsideration by the Administration has been given to confiscating all IRA and 401(k) accounts and requiring investment in US T Bonds, thereby federalizing such accounts, and removing self-direction of any type. See for example, an article entitled, Obama Begins Push to Confiscate IRA’s & 401(k)’s at www.silverdoctors.com. There has been no development of this sort in any major legislative way as of 2014. However, there have been discussion proposals by Congress and the Administration to reduce pre-tax qualified plan contributions or cap pre-tax contributions into all tax-sheltered accounts, based upon a maximum present value of a total fund of all a taxpayer’s tax-advantaged retirement accounts. to place limits on these accounts. However, as of the date of publication, there are at least some IRA vendors in the U.S. purporting to provide and expertly handle certain precious metal purchases (with metal storage in the package) utilizing the IRA vehicle.401(k) - A qualified plan could permit 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, unless a distribution in-kind is specifically taken. Distributions can be made in kind from a defined contribution qualified plan. However, the prohibited transaction rules must be carefully observed, and there is a 10 percent penalty for distributions of any kind taken prior to age 59½ and the Required Minimum Distribution rules (RMD rules) apply to accounts beginning at age 70½. Therefore, with potential negative income tax consequences, reporting, technical issues, and potential proposals to place additional limitations on these accountsIbid., use of a qualified deferred compensation plan to acquire precious metals, except in the stock or precious metals ETF form, generally may not be attractive (even in smaller companies for a sole participant with a solo 401(k) or defined benefit plan) as compared to owning metals personally. An investor should not utilize the 401(k) vehicle for other than precious metal stocks and the like until satisfied that any purported provider of such investments inside a 401(k) has both the expertise and experience to judge the appropriateness of use of this vehicle and to handle the special issues raised by actual precious metal purchases by a qualified plan, even (and maybe especially) in the sole shareholder situation.Nonqualified Deferred Compensation Plan – A nonqualified plan could permit 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 to achieve IRS income tax deferral and ERISA exemption objectives, and so the sponsoring business entity would actually possess ownership of the metal, even if held in a Rabbi Trust. In a nonqualified deferred compensation plan, the precious metal account can only be a record-keeping, notional account, 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, unless a pass-through tax entity (in which case the taxpayer stands in place of the entity based upon his or her pro rata ownership. However, the participant never has, nor can have, any beneficial interest in the underlying assets if it is to achieve the desired income tax deferral. The value of a participant’s notional account at the time of distribution should be taxable as ordinary income to the participant, and not as a capital gain, even if distributed in-kind in satisfaction of the employer’s debt to the participant based on the plan. Under Section 409A, covered plans may also not accelerate distribution of benefits, except in a few narrow situations.See generally, The Advisor’s Guide to Nonqualified Deferred Compensation, 2014 Ed., Richey, Baier & Phelan, SBM NUCO, 2014,Chapter 4, for an in-depth discussion of tax rules governing nonqualified deferred compensation plans, especially those covered by Code Section 409A. Planning Point: Satisfying a nonqualified deferred compensation account liability owed a participant by the distribution of actual precious metal rather than cash has ordinary income tax consequences, regardless, and also raises potential ERSIA and other income tax issues. Therefore, use of a nonqualified deferred compensation plan to acquire precious metals is not an attractive method for purchasing such metals.