Precious Metals

March 13, 2024

7701 / What are considered precious metals for investment purposes?

<div class="Section1"> For investment purposes, precious metals are traditionally considered the chemical elements gold, silver, platinum, and palladium. These are classified for their unique characteristics, such as luster, resistance to tarnish or corrosion, chemical stability, and rarity. Apart from most all other elements, the “precious metals,” like gold, silver, and, to a much lesser degree, platinum, are the most common hard asset investment options given their historical use as currency by nations. All four share the same properties that have made gold and silver especially desirable as money.<a href="#_ftn1" name="_ftnref1">1</a> Thus, these metals are highly sought after materials as stores of wealth that historically have held value over time against other forms of investments, and especially as compared to the value of paper currencies. Investors can invest in precious metals both directly by purchasing the asset in the form of actual bullion or in coins, and indirectly by investing in the stock of companies that either invest in precious metals or produce them. Another way to invest in precious metals is to purchase precious metal ETFs (exchanged-traded funds). Investment in a precious metal ETF should be considered to be an investment in the fund itself rather than in the underlying precious metal(s). In that sense, precious metal ETFs are more like investing in stock or a mutual fund. However, such ETFs are noteworthy because of their unique characteristics. For one, they are used to determine the current price (the spot price) for the metals, and second, they allow the investor to take delivery of the physical underlying metal if desired. This discussion focuses on direct investment in those assets commonly called precious metals in the form of bullion or coins. Gold, silver, and platinum are the most common investment metals of the four, while palladium, being new to the investment metals market, currently has fewer investment options. Unlike some other investments, precious metals and coins generally have a high degree of investment risk, including loss of principal, and the markets can be very volatile and are currently largely unregulated. In general, the IRS generally deems a precious metal asset investment a “collectible” and thereby a capital asset for income tax purposes. Hence, a net sale profit or loss is taxed as a capital gain or loss, and as either long-term or short-term. For long-term capital gains, the applicable tax rate in 2013 and beyond is based upon the ordinary income tax rate of the taxpayer. Further, for taxpayers with income in excess of $250,000 (joint returns) or $200,000 (single returns), the additional 3.8 percent investment income tax (the 3.8 percent net investment income tax, or NIIT) is added to the otherwise applicable capital gains rate. Therefore, as the discussion in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7702">7702</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7719">7719</a> suggests, the taxation of the investment is an important consideration. Despite this, it may be a lesser consideration in any decision to add precious metal to an investment portfolio. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Note, this commonality does not make them “like-kind” for purposes of the IRC Section 1031 tax-free exchange rules which, after 2017, now apply only to like-kind exchanges of real property. </div></div>

March 13, 2024

7703 / Can a taxpayer hold precious metals in an IRA?

<div class="Section1"> The list of precious metals that may be held in an IRA is specific and limited. Both life insurance and collectibles cannot be held in an IRA and, according to the IRS, “if you invest your IRA in collectibles, the amount invested is considered distributed in the year invested and you may have to pay a 10 percent additional tax on early distributions.” In effect, the transaction is treated as a premature taxable distribution. Therefore, investment assets in an IRA must be carefully selected, especially if they are precious metals. Here are some examples of prohibited collectibles currently listed on the IRS website: Artwork, metals (but there are exceptions for certain kinds of bullion that meet specific requirements), coins (but there are exceptions for certain coins that meet specific requirements), antiques, gems, alcoholic beverages, and certain other tangible personal property.<a href="#_ftn1" name="_ftnref1">1</a> <hr /> Planning Point: Despite this seemingly broad prohibition that looks to include precious metals, there are specific exceptions available for precious metal collectibles permitted in IRAs, but they are rather specific as one, one-half, one quarter, or one-tenth ounce U.S. gold coins, or one ounce silver coins minted by the US Treasury Department, An IRA may also invest in certain platinum coins, and certain gold, silver palladium and platinum bullion.<a href="#_ftn2" name="_ftnref2">2</a> Permissible precious metals IRA investments may only be found in IRC Section 408(m). <hr /> More detailed information on an IRA investment in permitted and prohibited precious metals “collectibles” is contained in IRS Publication 590, Individual Retirement Arrangements (IRAs). According to IRC Section 408, an IRA may only include any “gold, silver, platinum, or palladium of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section of the Commodity Exchange Act) requires for metals which may be delivered in satisfaction of a regulated futures contract.”<a href="#_ftn3" name="_ftnref3">3</a> Investors should always work with an IRA administrator/custodian experienced with permissible Section 408(m)(3) precious metals to avoid adverse tax consequences to the IRA, and its participant(s). Programs that promise the benefits of IRA investing but permit an investor to personally retain possession of the acquired permissible precious metal, as in a home safe, are unlikely to pass the IRS’s requirements for a valid IRA transaction and incur adverse income taxation.<a href="#_ftn4" name="_ftnref4">4</a> Note that the 2016 DOL fiduciary regulations would have made an advisor who sells or recommends products, as well as provides advice on investments to the owner of an IRA, an investment advisor fiduciary under ERISA subject to greatly expanded liabilities. This application of the ERISA fiduciary rules to IRAs was new. Those rules were vacated and have been replaced by the pre-existing five-part standard for determining investment advice fiduciary status. See Q3986 for details. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#Investments (Last reviewed or updated by the IRS on March 18, 2024). Also see DOL Reg. § 2550.404c-1. <a href="#_ftnref2" name="_ftn2">2</a>. Id. <a href="#_ftnref3" name="_ftn3">3</a>. See IRC § 408(m)(3). <a href="#_ftnref4" name="_ftn4">4</a>. According to the IRS (discussing Form 5498 at https://IRS.gov/retirement-plans/asset-information-reporting-codes-for-form-5498 (page last revised April 1, 2024)), “IRAs holding non-marketable securities and/or closely-held investments in which the IRA owner effectively controls the underlying assets of such securities or investments have a greater potential for resulting in a prohibited transaction.” </div>

March 13, 2024

7709 / What transactions involving precious metals are reportable on an investor’s income tax return for the sale year, including foreign tangible assets?

<div class="Section1"> All sales of precious metals result in a reportable income tax transaction, as a gain or a loss, for federal income tax purposes in the year of a sale. They are similarly reportable for purposes of any applicable state income tax. This reporting on a personal income tax return is required whether the sales transaction is structured as a like-kind exchange or not, and whether or not it is a reportable transaction on Form 1099B by a dealer. Of course, any failure to report income for federal (and state income tax purposes where applicable) can result in civil and/or criminal tax penalties. Specified foreign financial assets (if accounts exceed $10,000 at any time during a calendar year) were first required by law (so-called FBAR) to be reported by U.S. individual taxpayers on Form 8938 (Statement of Specified Foreign Financial) as part of the 2011 Form 1040. 2012 Form 8938 required disclosure of (1) foreign deposit and custodial accounts and (2) other foreign financial assets. On June 7, 2012, the IRS released guidance for completing this requirement. It provided three major pieces of guidance on the reporting of specified foreign financial assets on Form 8938: 1) A foreign safe deposit box will not be considered a financial account; 2) Taxpayers who meet the minimum filing thresholds must report all specified foreign financial assets; and 3) Taxpayers with foreign tangible assets such as precious metals (e.g., gold) or tangibles such as jewelry, autos, antiques, and other collectibles will generally not be required to report those assets on Form 8938 if the assets are held directly, unless those precious metals or other tangible assets are held through certificates issued by a foreign person, since the indirect ownership would be considered a “specified foreign financial asset.”<a href="#_ftn1" name="_ftnref1">1</a> In late 2016, FBAR filing deadlines were changed to June 30 from April 30 impacting filings for 2017 and subsequent years. The change also allows for a 6 month extension of filing. The IRS has also provided for electronic filing of the annual report on electronic Form FinCEN 114. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements (IRS website last updated February 29, 2024). </div>

March 13, 2024

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?

<div class="Section1"> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="7712">7712</a> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="710">710</a>. 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.<a href="#_ftn1" name="_ftnref1">1</a> 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.<a href="#_ftn2" name="_ftnref2">2</a> 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.<a href="#_ftn3" name="_ftnref3">3</a> 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.”<a href="#_ftn4" name="_ftnref4">4</a> (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 <a href="javascript:void(0)" class="accordion-cross-reference" id="710">710</a>. For the distinction between bullion-type coins and other valuable coins, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7713">7713</a>. 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.<a href="#_ftn5" name="_ftnref5">5</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Rev. Rul. 76-214, 1976-1 CB 218. <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 82-96, 1982-1 CB 113. <a href="#_ftnref3" name="_ftn3">3</a>.  Rev. Rul. 79-143, 1979-1 CB 264. <a href="#_ftnref4" name="_ftn4">4</a>.  Rev. Rul. 82-166, 1982-2 CB 190. <a href="#_ftnref5" name="_ftn5">5</a>.  California Life Ins. Co. v. Commissioner, 76 TC 107 (1981), aff’d, 680 F.2d 85 (9th Cir. 1982). </div></div>

March 13, 2024

7704 / Can a taxpayer hold precious metals within a qualified pension plan?

<div class="Section1"> The law currently allows a defined contribution 401(k) (and profit-sharing) qualified plan, and even a defined benefit plan, to invest in precious metals to the same extent permitted (and prohibited) under IRC Section 408(m) (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7706">7706</a>). However, advisors must also consider the prohibited transaction rules contained in IRC Section 4975 and ERISA Section 406, and the regulations under ERISA Sections 404(c) and 404(b) when investing in precious metals through a defined contribution qualified plan, including an IRA.<a href="#_ftn1" name="_ftnref1">1</a> As noted, qualified defined benefit pension plans are also legally permitted to invest in precious metals as plan assets subject to the same Section 408(m) requirements imposed on permissible investments, but such investment generally makes little sense when there are plan benefit maximums allowed. Actually, as the IRS notes, “although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments.” In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement.<a href="#_ftn2" name="_ftnref2">2</a> In addition, certain rules apply to specific plan types. For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan (ERISA Section 407). Certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors.<a href="#_ftn3" name="_ftnref3">3</a> Under the IRC, both participant-directed accounts and IRAs are prohibited from investing in certain collectibles. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7706">7706</a> for details. <hr> Planning Point: As a practical matter, a large corporate plan with many participants is unlikely to offer precious metals permitted under IRC Section 408(m)(3) as an investment in its “participant-directed” 401(k) plan because of the complications for the trustee, except perhaps in the stock or precious metals ETF form. <hr> However, for small business owners and professionals that can meet the qualifications to implement and use a so-called self-directed “solo 401(k)” (a one-person plan, or a precious metals IRA, and perhaps even a small solo defined benefit pension plan) precious metals might be purchased as a plan asset. However, even though some of these qualified plan vehicles may allow a pre-tax purchase of the investment, the vehicle itself generally requires compliance with substantial rules, especially prohibited transaction rules, and reporting requirements, plus with distribution treatment ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7703">7703</a>) of the investment from the plan that may make acquisition of the precious metal through one of these retirement plan vehicles less attractive than by individual purchase. No qualified plan approach to acquisition of plan-permissible precious metals should ever be attempted by an investor without professional legal and tax guidance, and a plan administrator both experienced with the special issues surrounding physical precious metals (other than precious metals stock interest and the like) as plan assets and a proven credible history of prior administration of such metals. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  See https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#Investments (last reviewed or updated by the IRS on March 18, 2024). <a href="#_ftnref2" name="_ftn2">2</a>.  ERISA § 404. <a href="#_ftnref3" name="_ftn3">3</a>.  Labor Reg. § 2550.404c-1. See also https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#Investments (Last reviewed or updated by the IRS on March 18, 2024). </div></div>

March 13, 2024

7702 / How may an individual invest in precious metals?

<div class="Section1"> Depending on the metal, investments may be made in two or three ways. In the case of gold or silver, an investor may purchase gold or silver bullion-type coins (e.g., the Canadian Maple Leaf), bars, or certificates that certify that a specific amount of the metal is housed in a specific warehouse for the investor. In the case of other metals, such as platinum or palladium, investments are made by the purchase of bars or certificates. Each method of investing in precious metals has its advantages and disadvantages. If an investor acquires bullion-type coins in a taxable transaction (such as in an exchange (noting that, post 2017 tax-reform, the IRC Section 1031 like-kind exchange rules apply only to exchanges of real property) or as payment of a stock dividend or for services rendered), the coins will be valued at fair market value, not face value, for purposes of that transaction (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7717">7717</a>). For the important distinction between bullion-type coins and other valuable coins, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7713">7713</a>. An investor might also consider a defined contribution qualified plan, including an IRA, and perhaps even a defined benefit qualified plan as a way to acquire certain precious metals investments. However, there are special limits on the types of investments, including in precious metals, that are permissible in retirement plans, and there are significant limitations (“prohibited transactions”) on moving assets in and out of a qualified plan trust that may make them an unsatisfactory vehicle to acquire precious metals (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7703">7703</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7704">7704</a>). In summary, each combination of metal and investment option carries certain advantages and disadvantages. Some precious metals may have more established markets. Other precious metals may have industrial purposes that can both hurt or help the value of the investment at any given moment, whether an investor is buying or selling in the market. Use of a qualified retirement plan vehicle for acquisition may or may not be appropriate and carries its own separate set of considerations and limitations. All these factors must be considered when making precious metals investments. <hr> Planning Point: In the case of an IRA (or individual retirement account), an important consideration is the IRS’ revised position<a href="#_ftn1" name="_ftnref1">1</a> regarding the limitation of one rollover a year. Before January 1, 2015, the IRS’ position in both the proposed regulations and its Publication 590 was that there was no limit on the number of IRA rollovers that a taxpayer could make, assuming the taxpayer owned multiple IRAs. However, per the Announcement, beginning January 1, 2015, a taxpayer will be allowed only one rollover per year regardless of how many IRAs the taxpayer funds. This limitation on rollovers places some limitations on a taxpayer’s ability to move investments around between different IRA-held investments.<a href="#_ftn2" name="_ftnref2">2</a> However, this limitation should not capture the following transfers: trustee-to-trustee direct IRA rollovers; qualified plan-to-IRA direct rollovers; IRA-to-qualified plan direct rollovers; certain Roth IRA conversations, whether direct or indirect (401(k)-to-401(k) transfers done as trustee-to-trustee transfers); and solo 401(k) in-plan Roth conversions, so options often will remain open that avoid taxation if carefully planned. <hr> It should be noted that the DOL’s “fiduciary” regulations became final in April 2017, and were partially implemented on June 9, 2017 would have made an advisor who sells or recommends products, as well as provides advice on investments (including precious metals) to the owner of an IRA, an investment advisor fiduciary under ERISA subject to greatly expanded liabilities. This application of the ERISA fiduciary rules to IRAs was new. The exemptions to this proposed ERISA fiduciary rule imposed significant preconditions on both the advisor and any provider financial institution, and contained the potential for changing the available forms of advisor compensation. As of the date of publication, the 2016 DOL fiduciary rule has been vacated and replaced by a new standard.  As of the date of this publication, the U.S. District Courts for the Eastern District of Texas and the Northern District of Texas have granted separate stays to block the DOL from enforcing its new investment advice fiduciary standard.<a href="#_ftn3" name="_ftnref3">3</a>  The 1975 test for determining fiduciary status (the “five part test” continues to apply until the case is resolved). See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for details. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  See IRS Ann. 2014-15 (Mar. 20, 2014); also see Bobrow v. Comm., TC Memo 2014-21, in which the IRS took the one-nontaxable-transfer-per-year position and surprisingly won. In light of the favorable Tax Court decision, the IRS then announced it would amend its proposed regulations and its publications to conform with the one transfer per year holding and interpretation under IRC § 408 (d)(3)(B). <a href="#_ftnref2" name="_ftn2">2</a>.  See IRS Ann. 2014-15 (Mar. 20, 2014). <a href="#_ftnref3" name="_ftn3">3</a> Federation of Americans for Consumer Choice v. Department of Labor, No. 6:24-cv-163-JDK (E.D. Tex. 2024) and American Council of Life Insurers v. Department of Labor, No. 4:24-cv-00482-O (N.D. Tex. 2024). </div></div>

March 13, 2024

7710 / Are state or local sales taxes imposed on the purchase of precious metals?

<div class="Section1"> State or local sales tax may be imposed on a purchase of precious metals, regardless of whether the form taken is pure bullion, bullion coins or numismatic coins. According to the Industry Council for Tangible Assets, Inc. (ICTA), some 27 states allow sales tax exemptions on precious metals and rare coins, but may have established minimum purchases to obtain the exemption.<a href="#_ftn1" name="_ftnref1">1</a> For example, California currently exempts only precious metals purchases in bullion and coin from California sales tax if the purchase is for more than $1,500 in-state (but does not currently cover the purchase of platinum bars), and also exempts all purchases of any size if the purchase is made from and delivered out-of-state (including platinum).<a href="#_ftn2" name="_ftnref2">2</a> Some states impose sales taxes on almost every type of transaction whether coins, paper, money, or bullion. These sales taxes can be substantial and can be a substantial impediment to investment in metals for investment purposes because they raise the break-even point. However, more states appear to be moving toward exempting the purchase of precious metals from sales taxes with Louisiana and Arizona specifically exempted certain precious metals in 2017.<a href="#_ftn3" name="_ftnref3">3</a> State sales tax rules on precious metal vary greatly by state both as to coverage or exemption. For example, Montana and Wyoming do not tax precious metals at the state level but allow for sales taxation at the local level (i.e., municipalities). Certain other states exempt large purchases (commonly purchases in excess of about $1,000 or $500) or exempt some precious metals (or currency) purchases, and not others, without any explanation for the differences. So, it is necessary and useful to ascertain whether a type of precious metal or specific transaction will be subject to a specific state’s sales tax at the time of any purchase. Where state sales tax exemptions exist, it has been observed that the newest precious metal, palladium, and even platinum, are frequently not yet on the list of precious metals exempt from state sales tax. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See www.JMBullion.com/investing-guide/taxes-reporting-iras/sales-tax-precious-metals/ for an updated list of states exempting sales taxation on at least certain precious metals. The two lists did not match because taxation or exemption is a moving target with the clear trend toward exemption of some precious metals or certain transactions involving precious metals. <a href="#_ftnref2" name="_ftn2">2</a>. Cal. Rev. & Tax. Code § 6355(b). <a href="#_ftnref3" name="_ftn3">3</a>. See HB 396 (Louisiana) that includes gold, silver and platinum coins as well as ingots; HB 2014 (Arizona) that covers precious metals that are in legal tender form (largely gold and silver US coins). The House and Senate in Tennessee passed companion bills exempting some precious metals from sales taxation in 2022. </div>