Your precious metals investments are—well, precious to your portfolio. They might not fit into the “get rich quick” scheme that some other investments fall under, but they are certain to act as a reliable part of your portfolio for the years and decades to come. Yet when it comes to investing in precious metals, the topic of taxes can become a bit of a hazy subject: When do I pay taxes? What type of taxes do I owe on my investments? How do I file taxes on my precious metals? What taxes even apply to precious metals, and are they nationwide or statewide?
When it comes to handling the taxes on your precious metals, or any type of investments, it is beneficial to have either a certified public accountant (CPA) or a tax advisor on hand. Either of these qualified accountants or advisors should be able to aptly help you understand how taxes affect your precious metals investments. Furthermore, they’ll have insider knowledge as to how state tax regulations apply to you and how national taxes affect your sales, all while offering insight into how to best manage your portfolio as a whole.
In the event that you don’t have either a CPA or tax advisor, or if you do and you’re looking for more personalized information without having to reach out to them, Provident Metals is here to help you navigate the ins and outs of tax regulations when it comes to your precious metals investments. In particular, we are going to discuss how and when you should think about the capital gains tax when it comes to your investments.
Alternative Investments and Taxes
Alternative investments often relate to the traditional foray of exchange-traded funds (ETF): stocks, commodities, and bonds. Taxes on ETFs are often straightforward, as it is a popular market in which many people either have or are trading in. However, precious metals, while still popular, seem like a completely different beast when it comes to reporting and paying taxes to the Internal Revenue Service (IRS) for your purchases and sales.
The truth of the matter is that it isn’t as complicated as it might sound. With a brief crash course, you can prepare yourself for tax season, making sure you are squared away with all of your assets. As stated above, the common concern is how the capital gains tax relates to your precious metals investments.
Capital Gains
When am I supposed to pay taxes on my precious metals? Is it when I sell them? And how much will my taxes be?
The IRS considers all precious metals—copper, silver, gold, platinum, and palladium—to be capital assets; however, the IRS also views precious metals not as investment assets, but as collectibles. This classification means that these assets are viewed as being more valuable than any other capital asset would. For this reason, due both to their view as an asset and a collectible, precious metals are subject to the capital gains tax in the eyes of the IRS. This might not sound like troubling news, but the worry for the owners of some precious metals is that their classification as a collectible can make them susceptible to the maximum collectible taxation rate for capital gains, which sits at a lofty 28%.
Again, this percentage might sound troublesome for potential investors, but it’s nothing to worry about. First off, we need to understand when it is that the capital gains tax applies to your precious metals; secondly, we need to understand how much you’re going to owe in capital gains tax when the time comes and how to estimate that; finally, we’ll need to discuss how you file and pay your taxes with the IRS, guaranteeing that all of your taxes are covered and your portfolio is secure.
What Is the Capital Gains Tax Rate?
There is a maximum capital gains tax rate, but how is my individual rate determined?
We mentioned the 28% capital gains tax above, which might bring a bead of sweat to your forehead, but it should be reiterated that this is currently the maximum you would ever have to pay on the sales/ownership of your precious metals. Individuals in higher tax brackets should be pleased by this information, as this means that your precious metals cannot be taxed any higher than the 28%.
For other individuals, the question of how high your rate will be is still pertinent. The truth of the matter is that the maximum percentage is a good figure to keep in mind, especially when putting money aside to eventually pay your taxes, but it is not necessarily the rate you’ll end up paying. A regular investor can expect to pay a lower capital gains tax rate, which will be determined by the IRS.
There are a few different factors that go into determining an individual’s capital gains tax rate, which include: the duration for which the precious metal has been in your possession—i.e., should the capital gain be considered as a short-term or a long-term investment—and your personal income tax rate. Most precious metals that are held for over a year tend to be considered long-term gains by the IRS, while ones sold shortly after purchase are considered short-term.
The Cost of Your Precious Metal Capital Gains
So, I owe taxes, but how much?
You purchased or received precious metals and eventually sold them at a profit. In this case, your precious metal investment will have a capital gains tax that will eventually need to be paid. How is this determined or even estimated? The common method to determine the amount you’ll owe in capital gains tax is tied to the “cost basis” of your precious metals: the price-per-ounce for which the precious metal was purchased.
While purchases tend to be one of the more common scenarios, the scenario of receiving your precious metal as a gift or inheritance also applies. The cost basis in this scenario depends on the spot price of the precious metal on the day that you received the metal as a gift. If you have the receipt of sale from the gift giver, and it shows the spot price of the precious metal was greater on the day of purchase than on the day of receiving the gift, the cost basis is still set as the day on which the gift was received.
An Example of Calculating the Capital Gains Tax
With the above information in mind, it is beneficial to run through a scenario in which you owe capital gains tax on the sale of your precious metals. The way we can determine the required capital gains tax to be paid comes down to four steps:
- Determining the cost basis for the precious metal on the day of purchase/ownership/inheritance
- Figuring the value of the sale of your precious metals
- Calculating the capital gains (profit) made from the sale of your precious metals
- Assessing how much you will owe due to the capital gains tax:
- Purchased Spot Price of Metal x Amount Owned = X
- Sold Spot Price of Metal x Amount Owned = Y
- Y – X = Z
- Capital Gains Tax % x Z = Tax Owed
Rather than working with variables, let’s set up a scenario:
You purchased 30 ounces of gold when its spot price was $1050/oz. You then sold all 30 ounces when the spot price reached $1180/oz. Assuming you are taxed at the highest collectible rate, 28%, let’s determine the amount you owe in capital gains taxes:
- $1050/ounce x 30 ounces = $31,500
- $1180/ounce x 30 ounces = $35,400
- $35,400 – $31,500 = $3,900
- 28% x $3,900 = $1,092
From the above example, we can see how the capital gains tax can be calculated/estimated ahead of time. If you have other precious metals profits or losses at the end of the year, you can calculate this into the total capital gains tax you’ll be required to pay. For instance, if you were to also make an $800 profit off of a holding of silver in addition to the above gold purchases, this could be calculated by adding this to step 4, such as this: 28% x ($3,900+$800) = $1,316. This is again assuming that they are taxed at the same rate, which may or may not be true.
The Benefit of Precious Metals When It Comes to Taxes
This seems like an awful amount of work. Why even sell my precious metals when it comes to all of these considerations?
Not too fast. While you have to consider capital gains when selling your precious metals, there is a particular benefit when it comes to these alternative investments. Depending on the state you live in, you might have to pay a sales tax when purchasing your precious metals, but you won’t be required to pay any other taxes when selling your assets—the sale does not affect your income, so it will not be taxed as payroll or FICA would be.
Furthermore, other assets, such as real estate, are subject to annual taxes. If you are in possession of real estate, you are required to pay an annual tax, even if your property lost value over the course of the year. This is not true for precious metals. The only taxes you’ll owe are when you sell your precious metal; otherwise, when the metals are in your possession, they are not subject to any taxes at all.
When to Pay Your Taxes
Okay, I owe capital gains tax on my precious metals sales, but when do I have to pay them? Do I pay them right after making a sale?
So, you have made your purchase and sale of your precious metals, and you happened to make a profit off the process. Do you have to pay your capital gains taxes right away? No. Rather, like your other taxes, the IRS states that you must report your capital gains taxes annually. These can be submitted in addition to your other annual taxes.
This not only streamlines the process for both you and the IRS but allows for less complication when it comes to capital gains. This is especially true for people who are buying and selling various amounts of their assets over the course of a year, where numerous gains and losses might come into play. Rather than having to pay taxes with each and every sale, it proves far easier to handle your taxes when the calendar year has come to an end.
How Do I Report Taxes for My Precious Metals?
What forms am I required to fill out and submit to not face a penalty or audit?
When completing and submitting your annual taxes for the IRS, there is a specific form you should have in your possession: Schedule D of Form 1040 is particularly required for all sales of gold and silver, so you should be certain to fill out one of these forms. Additionally, the IRS might also require you to fill out Form 1099-B if you sold any items such as antique coins or minted bullion, as the sale of these items might be seen as individually earned income.
In the end, the benefit to investing in precious metals is that you only have to worry about taxation on your assets whenever you sell them—they will not be taxed like your income, nor will they be subject to annual taxes like real estate. Instead, you can own your precious metal investments, watch their spot price, and decide when the time has come to sell them. If you have any questions concerning your past sales prior to the upcoming tax date, don’t hesitate to reach out to us at Provident Metals. We want you to get the most out of your precious metals.
Joe Kazilionis says
Thank you for your very helpful article on taxes due on sale of precious metals. This is the only one I have seen from any precious metals dealer. Very helpful!