Purchase of precious metals can be an excellent investment choice; however, any profits realized may have tax ramifications.
If you purchase precious metals with cash from an authorized dealer in person, he or she must report this transaction to the IRS, since purchases of such metals fall into the category of related transactions.
Taxes on Capital Gains
Gold and other precious metals’ values may fluctuate rapidly, and investors who sell assets that generate profits could face capital gains taxes if the sale results in any profit. Capital gains refers to any increase in value due to market changes that does not involve manual labor from an investor; profits that result from this can be taxed differently depending on how long an investor held onto these assets and his or her individual tax bracket.
Investors have several options when purchasing physical gold, or investing in funds which represent it by proxy. Physical gold purchases are considered collectibles and taxed at higher maximum collectible rates; investments made via mutual or exchange-traded funds that hold physical metals will typically be subject to normal long-term or short-term capital gains tax (CGT) rates.
Investors can reduce their CGT rate by offsetting any gains with any losses realized during a given year or carried over from previous ones, thus helping maximize after-tax returns on any future sales transactions.
Money Laundering
Money laundering is an illegal and widespread activity that allows criminals to conceal illegal funds within legitimate financial systems. Money laundering aids drug dealers, arms dealers, corrupt officials and terrorists by helping their operations expand while financial institutions must comply with anti-money laundering regulations or face stiff fines for failing to do so.
Turning illegal money into legal currency typically entails three stages: placement, layering and integration. The initial introduction of illicit funds into legal economy may involve operating cash-for-gold stores, purchasing gold bullion with duffel bags filled with hundred dollar bills or selling jewellery or other items at high margins for resale at great profits.
Criminals employ layering strategies to make their transactions appear legitimate by opening multiple accounts and businesses, using associates or family members to manage finances, and physically altering gold bars to give an appearance of legitimacy. Any suspicious transactions should be investigated by regulatory authorities.
Privacy Concerns
New research reveals that Americans are generally concerned about companies sharing personal information without permission (42%), identity theft (38%), and law enforcement monitoring online activities (15%). Yet when it comes to precious metal purchases, most don’t worry about either their government or dealers becoming aware that a deal has taken place.
However, occasionally dealers must report gold sales to the IRS. This is because certain bullion items fall under the IRS’s Reportable Items List such as coins with fractional denominations or US currency created post-1980; dealers will then need to submit Form 8300 after each such transaction if applicable and failing to do so may incur fines or even business termination.
As an alternative, investing your bullion and coin investments through an IRA account is the way to go if you wish to avoid reporting issues and fulfil all reporting requirements.
Dealers
Precious metal investors need to keep in mind two tax considerations when selling bullion at a profit: capital gains taxes and ordinary income tax rates. Capital gains taxes are calculated based on an investor’s “cost basis,” or original purchase price for their investment; their tax rate depends on both factors.
Dealers must report all profitable sales to the IRS on Form 1099-B in order to prevent tax evasion, which would occur if precious metals dealers simply failed to fulfill their reporting responsibilities.
There are legal safeguards in place to protect personal information on financial reports, while maintaining balance between anti-money laundering efforts and individual privacy rights. While understanding how these rules impact gold investments can be useful, you needn’t feel intimidated by government scrutiny when collecting this precious asset.
