7705 / When a precious metal is sold, how is the transaction taxed?

Unless a precious metal is part of a tax straddle owned by the investor, or is part of a conversion transaction, no special tax rules apply to its sale. Therefore, to the extent that the selling price received exceeds the individual’s tax basis (see Q 692) in the metal, the individual must report a taxable gain for income tax purposes. If the individual’s tax basis in the metal exceeds the selling price, he or she may report a loss from the transaction. Metal held as an investment is considered a capital asset, and gain or loss on the sale will be considered a capital gain or loss (see Q 698) subject, however, to the special rules for collectibles. See Q 7581 to Q 7582. Whether the capital gain or loss will be long-term or short-term depends on how long the investor owned the metal prior to sale. See Q 699. For the treatment of capital gains and losses, see Q 702.

When bullion-type coins are acquired in the ordinary course of a taxpayer’s trade or business, the taxpayer’s purpose for holding the coins at the time of their disposition (even if different from the taxpayer’s purpose in acquiring them) apparently controls for purposes of determining whether their sale results in capital gain (or loss) or ordinary income (or loss).¹

The sale of a precious metal that is part of a tax straddle is subject to special tax rules (see Q 7593 to Q 7614), as is the sale of a precious metal that was held as part of a conversion transaction. See Q 7615 and Q 7616.

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Planning Point: In light of the 2017 tax reform legislation changes in taxation (as to deductions, ordinary and capital gain tax rates), and the 3.8 percent investment income tax imposed on certain passive investments held by taxpayers with income in excess of specified threshold levels that became effective in 2013, sellers should carefully check to determine the tax impact of a proposed sales transaction. Some sales, if poorly timed, may now push the selling investor into higher tax brackets and therefore result in a smaller net gain for an investor.

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State income taxation: Some states (and local county and city governments) impose a separate state income tax on precious metal sales transactions. The rates and tax treatment vary widely by state, and the tax can be substantial depending upon the state in which the sale takes place. As of the date of this publication, those states that apparently do not impose an income tax on such a sale are Alaska, Florida, New Hampshire, Nevada, Tennessee, Texas, South Dakota, Washington, and Wyoming (primarily because these states have no state income tax). Advisors should research the impact of the applicable state capital gains taxation and other income tax regime at the time of proposed sale to assess the impact of such taxation on their specific sales transaction.