When purchasing precious metals in the United States, it is essential that you are cognizant of federal laws regarding reporting requirements for purchases of precious metals.
These laws resemble the “Know Your Customer” requirement implemented by banks to combat money laundering, yet also cover gold dealers.
How to Avoid Taxes
If you’re considering buying gold to secure your financial future, there are certain tax implications you should be aware of. Specifically, the Internal Revenue Service considers gold and silver collectibles; any profits generated on them will likely incur a higher tax rate than many other investments.
Hold your gold for more than one year to limit taxes on gains; otherwise, the IRS may also tax any short-term gains you realize upon selling them.
If you’re unsure whether physical gold is right for you, exchange-traded funds (ETFs) offer more favorable tax treatment than physical investments. But be mindful that physical gold requires more due diligence when making its purchase decision.
Taxes on Capital Gains
When selling gold bullion bars or coins, any profits must be reported to the IRS as they are considered collectibles.
As collectibles are taxed at a higher rate than most investment assets, it may be wise to avoid investing in them. If purchasing gold bullion bars or coins it would be prudent to hold onto them for at least 12 months prior to selling as this will minimize your taxes.
The IRS levies a long-term capital gains tax rate of 28% on collectibles like gold. This figure exceeds the standard 15% tax rate applicable to most investments assets.
Investment in an exchange-traded fund (ETF) that tracks gold could help reduce taxes on your capital gains. ETFs can be purchased using qualified retirement plans like an IRA.
Taxes on Resale
Gold is a precious metal and the IRS treats it like any other capital asset; depending on how long you hold onto the gold before selling it, you may either incur short-term or long-term capital gains taxes on its sale.
To calculate whether or not you made a gain on gold, subtract your cost basis — what you paid for the metal plus transaction costs such as fees and dealer commissions — from your net proceeds. If you sold the gold for $6,000 plus $150 fee, your cost basis would be $5,150.
Any profits on the sale of collectibles such as gold jewelry are subject to 28 percent taxes, although if held less than one year you may avoid having to pay this fee altogether. Either way, any sales must be reported on your tax return and reported as part of any gains/losses reported for income tax filing purposes.
Taxes on Cash Payments
Gold buyers must report all sales transactions to the IRS to avoid tax penalties, by filling out and filing out a 1099 form after every transaction.
Capital gains taxes on precious metals are determined by how much profit is realized from selling your precious metal assets, with rates depending on both how long you held onto them and your income level.
Gains are calculated based on the current fair market value (FMV) of an item purchased with gold less its original purchase price and any increase in value over time due to gifts, inheritance or sales transactions.
As is evident by now, purchasing and selling gold has various tax ramifications. Understanding their effects will enable you to make informed purchases decisions and maximize profits.