Many investors prefer to own physical gold and silver instead of exchange-traded funds (ETFs) that invest in these precious metals. While the tax implications of owning and selling ETFs are very straightforward, not many people fully understand the tax implications of owning and selling physical bullion. Below is a description of how these investments are taxed, as well as their tax-reporting requirements, cost basis calculations, and ways to offset any tax liabilities from the sale of physical gold or silver.
Tax Implications of Selling Physical Gold or Silver
Physical holdings in precious metals such as gold, silver, platinum, palladium and titanium are considered by the Internal Revenue Service (IRS) to be capital assets specifically classified as collectibles. Holdings in these metals, regardless of their form—such as bullion coins, bullion bars, rare coinage or ingots—are subject to capital gains tax. The capital gains tax is only owed after the sale of such holdings and if the holdings were held for more than one year. While many tradable financial securities, such as stocks, mutual funds and ETFs, are subject to short-term or long-term capital gains tax rates, the sale of physical precious metals is taxed slightly differently. Physical holdings in gold or silver are subject to a capital gains tax equal to your marginal tax rate, up to a maximum of 28%. That means individuals in the 33%, 35% and 39.6% tax brackets only have to pay 28% on their physical precious metals sales. Short-term gains on precious metals are taxed at ordinary income rates.
Tax liabilities on the sale of precious metals are not due the instant that the sale is made. Instead, sales of physical gold or silver need to be reported on Schedule D of Form 1040 on your tax return. Depending on the type of metal you are selling, Form 1099-B must be submitted to the IRS at the time of the sale, as such sales are considered income. Items that require such filing include $1,000 face value of U.S. 90% silver dimes, quarter or half dollars and 25 or more 1-ounce Gold Maple Leaf, Gold Krugerrand or Gold Mexican Onza coins. Gold and silver bars that are 1 kilogram or 1,000 troy ounces require the filing as well. American Gold Eagle coin sales do not require a Form 1099-B filing. The tax bill for all of these sales is due at the same time that your ordinary income tax bill is due.
Cost Basis of Physical Gold and Silver
The amount of tax owed on the sale of precious metals depends on the cost basis of the metals themselves. If you purchase the metals yourself, then the cost basis is equal to the amount paid for the metal. The IRS does allow you to add certain costs to the basis, which can reduce your tax liability in the future. Certain items, such as the cost of appraisals, can be added.
There are two special scenarios for calculating the cost basis of physical gold or silver. First, if you receive the metals as a gift, the cost basis is equal to the market value of the metals on the date that the gifter purchased them. If at the time of gifting the market value of the metals is less than what the person giving them to you paid, then the cost basis is equal to the market value on the day that you receive the gift. As for the second special scenario, if you inherit gold or silver, then the cost basis is equal to the market value on the date of death of the person from whom you inherited the metals.
Tax Example and Offset Possibilities
As an example, assume you purchase 100 ounces of physical gold today at $1,330 per ounce. Two years later, you sell all of your gold holdings for $1,500 per ounce. You are in the 39.6% tax bracket. The following scenario occurs:
Cost basis = (100 x $1,330) = $133,000
Sale proceeds = (100 x $1,550) = $150,000
Capital gains = $150,000 - $133,000 = $17,000
Tax due = 28% (maximum percentage) x $17,000 = $4,760
Capital losses on other collectibles can be used to offset a tax liability. For example, if you sell silver at a $500 loss, then you can net these amounts and only owe $4,260. Or, you can save the $500 as a loss carry forward for the future.