7711 / How is an individual taxed if, instead of selling a precious metal, the individual exchanges it for other property in a “like-kind” exchange?

Editor’s Note: For tax years beginning after 2017 under the 2017 tax reform legislation, “like-kind” exchange treatment under IRC Section 1031 is only permitted with respect to exchanges of real property. The rules below outline the pre-2018 like-kind exchange rules. Such an exchange will now result in a taxable event for federal and state income tax purposes.  See Q 7712 for the income tax treatment that results upon sale. This dramatically reduces the opportunity for desired tax-free exchanges of precious metals of the same kind.

Before 2018, if a precious metal was exchanged solely for another precious metal of the same nature and character (e.g., gold for gold, or silver for silver), the transaction generally received nonrecognition income treatment, subject to the rules for like-kind exchanges under IRC Section 1031. See Q 710. Thus, the exchange of bullion-type gold coins minted by one country (Mexican 50-peso gold coins) for bullion-type gold coins minted by another country (Austrian 100-corona gold coins) qualified as a like-kind exchange.¹ Similarly, the exchange of gold bullion for Canadian Maple Leaf gold coins (i.e., bullion-type coins that are legal tender in Canada but only to the extent of $50 face value each) was a like-kind exchange.²

However, the exchange of a numismatic coin (U.S. $20 gold coins) for a bullion-type coin (South American Krugerrand gold coins) was not a like-kind exchange.³ Likewise, the exchange of gold bullion for silver bullion did not qualify as a like-kind exchange, since “silver and gold are intrinsically different metals and are used in different ways.” Therefore, an “investment in one of the metals is fundamentally different than investment in the other metal.”⁴ (This reasoning would appear to apply to an exchange of any two different metals.)

For an explanation of like-kind exchanges and the effect of giving or receiving money or other property in connection with an otherwise like-kind exchange, see Q 710. For the distinction between bullion-type coins and other valuable coins, see Q 7713.

In one of the few cases to address like-kind exchanges of precious metals, the Tax Court held that the exchange of gold coins for Swiss Francs was not a like- kind exchange.

The Court said that coins are exchanged in the marketplace for their collector’s numismatic value, based upon rarity. In contrast, Swiss Francs are currently circulating currency of the Swiss government and they represent investments in the Swiss economy.⁵