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Gain on Investment in Gold or Silver

If you hold gold or silver in any form such as coins, jewelry or bars (Bullion), you should know the IRS may treat this as a special type of investment. Gold and silver are precious metals which are classified by the IRS as collectables and may be taxed at a special rate.

Most of us do not think about the things we buy or later sell at our yard sale, craigslist or to a pawn shop as a taxable event. The gold and silver jewelry you sell could have taxable gain if the original cost was less than the amount received in the sale. A sale is considered when you transfer legal possession or title in any transaction where money or other consideration is received. Either selling your jewelry to a pawn shop or instructing your custodian of your gold bullion bars to find a buyer and selling are sales with potential tax impacts.

Hobby Collectable or Investment Collectable - Owning collectables could be considered a hobby or an investment. What is the difference? The IRS considers that if you purchase most items and sell it for more than you paid, you pay a capital gain on the difference. If you purchase collectibles such as antiques, photographs, artworks, coins and stamps as a hobby with no intent to make a profit, you must report any income received and can claim expenses only up to the amount of income. You can’t take a loss. If you purchase gold, silver, coins, antiques and old cars with a profit motive, you are taxed on gain and can take losses. The IRS treats the difference based on actions and circumstances.

Gain on Sale of Gold and Silver – Calculating the gain or loss is like any other investment, stock, or asset. The basis or cost in the gold or silver is the original purchase price plus any cost of purchase. The proceeds are the money received or the fair market value of property received in the sales transaction. Gain or loss is then calculated as the proceeds of the sale minus the basis/cost and any cost of selling the gold or silver. If there is a loss on the sale and is considered an investment, you may be able to be use up to $3,000 a year to off-set any others gains during that year.

Tax on Gain - The normal tax rate for long term gain on investments is 15%. Collectables like gold and silver is taxes at 28%. This may be above or below your marginal tax rate (the rate at which your next dollar of taxable income is taxed). Your income level has no impact on this rate, so low or high income earners pay the same collectable tax rate. If you hold the gold or silver for one year or less, any gain is taxed at your ordinary rate of 10-35%.

Cost of Maintaining an Investment - Collectors can offset their profits with certain expenses and could annually write off some of the maintenance and upkeep of their investments as part of your itemized deductions. This could include costs such as insurance, special storage, investment advice and other costs associated with collecting and maintaining your gold and silver. Because these costs can be questioned in an audit, work with your tax professional to see if they are valid annual investment costs that can be deducted each year.

Owning Shares of a Gold Mine or Repository of Gold Bars - Owning shares of a gold mine is not considered owning a collectable directly. To own the collectable you must to have physical possession of the precious metal. The mine owns the operation of extracting and refining with the intent to sell the gold or silver. They are not collecting it for future gain. Owning stock in a company, fund or ETF (exchange traded fund) that holds gold or silver bars as a custodian for their investors where you own a percentage of the stored medals is considered collectable and taxed at 28%. Such an investment is the EFT - SPDR Gold Trust (‘GLD’). The SPDR Gold Trust is the custodian for the investors of physical gold bullion held in a vault in London.

Investing in gold or silver has many facets which need to be considered when filing your tax return. You need to determine if you are a hobbyist or investor, have personal or collectable property, need to report collectable gain or loss and have to track expenses that are deductible. Read up on all of these areas before you invest in gold or silver and carefully consider the impact on your tax responsibility.

Investment Disclaimer - Any discussion of investments in collectables, precious metals, gold or silver is not intended as investment advice. The author is not an investment advisor and does not recommend or give advice on investments. Consult your investment advisor and/or tax professional on any investment and tax questions related to collectable investments.

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