Question About Gold and Taxes

[stuper1]

I'm writing up a financial plan for my wife should I die.  She's a smart woman, but not really interested in financial stuff, so I'm trying to keep it simple.  I like the idea presented elsewhere of say 80% VWINX, 10% gold, and 10% cash.  The life insurance money would go into a Vanguard taxable brokerage account.  The 401k money would go into a Vanguard Inherited IRA (tax-deferred account).  Some of the gold would be physical held in our safe deposit box, but a lot of it would be in an ETF like say IAU. 

Here's my question:  should the gold ETF be held in the Inherited IRA, or should it be held in the taxable brokerage account?  I'm thinking it should be in the IRA, because if she sells gold to rebalance, it will just go into the sweep account before she withdraws it, and then it will just get taxed as ordinary income (is that true?) at her tax rate, which may be say 15%.  If the gold ETF were in the taxable account, then I believe it would get taxed at the collectible rate of 28% (is that true?).

However, in Rowland and Lawson's recent book on the HBPP, they say that gold should normally be the last thing to put into a tax-deferred account, because it is already tax efficient on its own.  This conflicts with what I stated above.

Can anybody help me think through this?  Thanks!

[Xan]

My understanding is that gold in a taxable account would be taxed at the lower of your earned income tax rate and the 28% max collectibles tax.  (Please, someone correct me if I'm wrong.)

That means that she'll only be taxed at 28% for the gold if she's in the 28% or higher income tax bracket.  Does that change anything?

[stuper1]

Definitely, that would change things.  But that is not my understanding of how it works.  My understanding was that she would be taxed at 28% for gold no matter what her income tax bracket.

Can someone please tell us which is correct?

[Kshartle]

Xan is correct. Gains on gold sold is taxed at the lesser of 28% "collectibles" rate or your marginal tax rate.

In that way it has a small advantage over bonds and somewhat over stocks if you want to avoid taxes on dividends.

Of course gold coins held in fully taxable form in your house can always get lost............

[Xan]

Of course gold coins held in fully taxable form in your house can always get lost............

A lot of people seem to take their gold out on risky boating excursions.  :-)

[whatchamacallit]

I understand the capital gains collectable rate as a cap. If your regular tax rate is lower than the capital gain caps, you use your regular tax rate.

http://www.irs.gov/publications/p17/ch16.html#d0e56153

If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies.
Example.

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. If you are otherwise subject to a rate lower than 28%, the 28% rate does not apply.

[Greg]

I've been looking into tax loss harvesting for end of year for gold. There's a lot on this website but I'm wondering if the posts should all be pulled into one particular thread and then sticky'ed so that people when they have questions about owning gold and taxes, it'll be very convenient.

Here should be the documents you need for capital gain/loss of gold (let me know if I missed any)
http://www.irs.gov/pub/irs-pdf/f8949.pdf
http://www.irs.gov/pub/irs-pdf/f1040sd.pdf  (1040 schedule d form)
http://www.irs.gov/pub/irs-pdf/i1040sd.pdf    (1040 schedule d instructions)

The question I haven't fully understood yet are is for the four scenarios and whether I have them correct below:

1.) Short-term Capital Gain: You take the capital gains and add it to your income at whatever tax bracket you are in (max 28%)
2.) Short-term Capital Loss: You take the capital loss and subtract it from your income at whatever tax bracket you are in (max 28%)
3.) Long-term Capital Gain: You take the capital gains and add it to your income at whatever tax bracket you are in (max 28%)
4.) Long-term Capital Loss: You take the capital loss and subtract it from your income at whatever tax bracket you are in (max 28%)

Is there any difference between Short and Long when it comes to Collectibles?

[Libertarian666]

I've been looking into tax loss harvesting for end of year for gold. There's a lot on this website but I'm wondering if the posts should all be pulled into one particular thread and then sticky'ed so that people when they have questions about owning gold and taxes, it'll be very convenient.

Here should be the documents you need for capital gain/loss of gold (let me know if I missed any)
http://www.irs.gov/pub/irs-pdf/f8949.pdf
http://www.irs.gov/pub/irs-pdf/f1040sd.pdf  (1040 schedule d form)
http://www.irs.gov/pub/irs-pdf/i1040sd.pdf    (1040 schedule d instructions)

The question I haven't fully understood yet are is for the four scenarios and whether I have them correct below:

1.) Short-term Capital Gain: You take the capital gains and add it to your income at whatever tax bracket you are in (max 28%)
2.) Short-term Capital Loss: You take the capital loss and subtract it from your income at whatever tax bracket you are in (max 28%)
3.) Long-term Capital Gain: You take the capital gains and add it to your income at whatever tax bracket you are in (max 28%)
4.) Long-term Capital Loss: You take the capital loss and subtract it from your income at whatever tax bracket you are in (max 28%)

Is there any difference between Short and Long when it comes to Collectibles?

Yes, collectibles have both short- and long-term rates just like "normal" investments; they are both short-term for a holding period of less than 1 year and the latter for at least 1 year. The only difference is that the maximum long-term rate for collectibles is 28% (perhaps + the obamacare tax) rather than 20% (perhaps + obamacare tax) for "normal" investments.

[ochotona]

Is reforming this "collectibles" mess part of anyone's U.S. Federal tax reform agenda? Maybe in the future we will have a better President who will actually work with congress and do something. Are there any champions of this issue on Capitol Hill?

[sophie]

I've been looking into tax loss harvesting for end of year for gold.

I did it last year and it was a lot simpler than I thought it would be.  The wash sale rules don't apply to gold.  I picked a company based on researching their buy/sell spreads & fees, and called.  They told me a lot of people were doing the same thing.  They sent me two invoices (one for sale, one for purchase) and billed me only for the net cost of the transaction.  I wrapped up my coins in a box, went to the post office, and sent it registered mail.  The "new" coins arrived a week or so later.

For tax purposes, I reported as I would any other long term capital loss transaction using the figures on the sale invoice and my original purchase records - Libertarian666's forms are the right ones.  There was a substantial capital loss that maxed the deduction for last year.  I took the rest as carryover this year.  The collectibles tax doesn't enter into it, because it's not a gain.

BTW strongly recommend coins in taxable, and reserving ETFs for tax-advantaged accounts.  Simple is better, and there are significant advantages to owning physical gold.

[MachineGhost]

Is reforming this "collectibles" mess part of anyone's U.S. Federal tax reform agenda? Maybe in the future we will have a better President who will actually work with congress and do something. Are there any champions of this issue on Capitol Hill?

No.

Wish I had found this thread before doing all that analysis about the matrix in the other thread.  As I recall, the bottom line is the tax rate is between 0% and 28% for long-term collectibles depending on your gross income.  I really don't know why there is a separate tax schedule for collectibles but there must be a historical reason.  Perhaps it was broken away from regular long-term capital gains at one time which used to be the same as those 90% marginal income tax rates, I believe.  Aren't we so glad we shifted to the right?

[Libertarian666]

I've been looking into tax loss harvesting for end of year for gold.

I did it last year and it was a lot simpler than I thought it would be.  The wash sale rules don't apply to gold.  I picked a company based on researching their buy/sell spreads & fees, and called.  They told me a lot of people were doing the same thing.  They sent me two invoices (one for sale, one for purchase) and billed me only for the net cost of the transaction.  I wrapped up my coins in a box, went to the post office, and sent it registered mail.  The "new" coins arrived a week or so later.

For tax purposes, I reported as I would any other long term capital loss transaction using the figures on the sale invoice and my original purchase records - Libertarian666's forms are the right ones.  There was a substantial capital loss that maxed the deduction for last year.  I took the rest as carryover this year.  The collectibles tax doesn't enter into it, because it's not a gain.

BTW strongly recommend coins in taxable, and reserving ETFs for tax-advantaged accounts.  Simple is better, and there are significant advantages to owning physical gold.

Actually it was 1NV35T0R (Greg) who pointed to the forms; I just explained the rules for short- vs. long-term.

If you don't mind my asking, what company did you use for the tax loss harvesting? I haven't done that myself with physical gold, so I don't have a preferred provider.

[Greg]

Yes, collectibles have both short- and long-term rates just like "normal" investments; they are both short-term for a holding period of less than 1 year and the latter for at least 1 year. The only difference is that the maximum long-term rate for collectibles is 28% (perhaps + the obamacare tax) rather than 20% (perhaps + obamacare tax) for "normal" investments.

I guess I didn't explain myself well enough. I was trying to figure out what the difference was between a short-term loss and a long-term loss for collectibles. Look at my example below and see if this is correct (in mathy terms)

Taxable Income: $30,000 (so in  15% tax bracket)
Short-term Gold Loss: $1,000
Tax Savings: 15%*$1,000 = $150

or

Taxable Income: $30,000 (so in  15% tax bracket)
Long-term Gold Loss: $1,000
Tax Savings: 15%*$1,000 = $280



but let's say you were in the 33% tax bracket

Taxable Income: $200,000 (33% tax bracket)
Short-term Gold Loss: $1,000
Tax Savings: 33%*$1000 = $330

versus

Taxable Income: $200,000 (33% tax bracket)
Long-term Gold Loss: $1,000
Tax Savings: 28%*$1000 = $280 (28% maximum)

Are these all correct?

[Libertarian666]

Yes, collectibles have both short- and long-term rates just like "normal" investments; they are both short-term for a holding period of less than 1 year and the latter for at least 1 year. The only difference is that the maximum long-term rate for collectibles is 28% (perhaps + the obamacare tax) rather than 20% (perhaps + obamacare tax) for "normal" investments.

I guess I didn't explain myself well enough. I was trying to figure out what the difference was between a short-term loss and a long-term loss for collectibles. Look at my example below and see if this is correct (in mathy terms)

Taxable Income: $30,000 (so in  15% tax bracket)
Short-term Gold Loss: $1,000
Tax Savings: 15%*$1,000 = $150

or

Taxable Income: $30,000 (so in  15% tax bracket)
Long-term Gold Loss: $1,000
Tax Savings: 15%*$1,000 = $280 $150



but let's say you were in the 33% tax bracket

Taxable Income: $200,000 (33% tax bracket)
Short-term Gold Loss: $1,000
Tax Savings: 33%*$1000 = $330

versus

Taxable Income: $200,000 (33% tax bracket)
Long-term Gold Loss: $1,000
Tax Savings: 28%*$1000 = $280 (28% maximum)

Are these all correct?

They look correct to me, other than the typo that I corrected.

However, the general answer, as far as I know, is that the treatment of collectibles is EXACTLY THE SAME as that of non-collectibles, other than the maximum rate (and the apparent lack of wash-sale rules, which isn't relevant in your examples).

So however you would calculate a gain or loss with a "normal" asset that doesn't attract the collectible rate, you do the same calculation, substituting the collectible rate.

[Greg]

Thanks for fixing the typo.

It looks like according to Sophie that if you have a gold loss (long or short term), you just put it on the form 8949 as a long or short terms loss. You then just roll this up into 1040 Schedule D for line 16 and as long as it is a loss, you totally skip over the 28% Rate Gain Worksheet in the Schedule D Instructions sheet so collectibles or not, you pretty much finish that as normal (putting total tax on line 44 on tax form 1040).

Only if you have a gain will you have to fill out the 28% Rate Gain Instructions worksheet and then put the total tax on line 44 on tax form 1040.

[sophie]

If you don't mind my asking, what company did you use for the tax loss harvesting? I haven't done that myself with physical gold, so I don't have a preferred provider.

APMEX.  I suspect any of the reputable companies would have handled it as well.

[Libertarian666]

Thanks for fixing the typo.

It looks like according to Sophie that if you have a gold loss (long or short term), you just put it on the form 8949 as a long or short terms loss. You then just roll this up into 1040 Schedule D for line 16 and as long as it is a loss, you totally skip over the 28% Rate Gain Worksheet in the Schedule D Instructions sheet so collectibles or not, you pretty much finish that as normal (putting total tax on line 44 on tax form 1040).

Only if you have a gain will you have to fill out the 28% Rate Gain Instructions worksheet and then put the total tax on line 44 on tax form 1040.

"H&R Block at Home" handles this automatically, as long as you identify the item as attracting "collectibles" treatment.

[ochotona]

Let's say you had to get rid of some gold at rebalance time...

Could you not donate the gold to a charity and thereby bypass the collectibles tax on the capital gain entirely? If you were a regular giver to a church or other 501c(3) organization, why not? I have done this with appreciated stock, and have given away my capital gains tax problem after good stock market years.

I'm pretty sure most organizations will take donations of IAU, SGOL, and other paper gold assets. I know my church will. It's just a symbol that shows up in their brokerage account from me. Not sure if they will accept metal. I'll have to check with them.

[Xan]

The coolest way to do this is out of an IRA.  Then not only are you bypassing the capital gains taxes, you're bypassing income tax completely!  (Though not FICA of course.)

[MachineGhost]

You could probably take this even futher if you use collectible gold where you can donate at FMV but have your cost basis at what you originally paid and take the difference off your taxes.  I don't know what would qualify but I doubt it would work for semi-numi or bullion, since you would need to be able to buy at wholesale below FMV.

[Greg]

'Nuther thing, is GIFT the gold metal to a highly trusted person who has a low marginal tax rate, maybe you have a child you is a young adult and isn't making much money yet. They can sell the gold, claim and pay the Collectibles tax on their Federal tax return, and then (maybe in the next tax year), gift the net proceeds back to you; so it could be a December / January exchange. Just be careful about exceeding the Federal gift tax limit, something like $14,000 per year per person, and they do index it to inflation.

See this thread on this idea. Just be careful that it isn't tax evasion.
http://gyroscopicinvesting.com/forum/ot ... #msg107485

[ochotona]

'Nuther thing, is GIFT the gold metal to a highly trusted person who has a low marginal tax rate, maybe you have a child you is a young adult and isn't making much money yet. They can sell the gold, claim and pay the Collectibles tax on their Federal tax return, and then (maybe in the next tax year), gift the net proceeds back to you; so it could be a December / January exchange. Just be careful about exceeding the Federal gift tax limit, something like $14,000 per year per person, and they do index it to inflation.

See this thread on this idea. Just be careful that it isn't tax evasion.
http://gyroscopicinvesting.com/forum/ot ... #msg107485

Right...upon further reflection, the communication from my brokerage company suggested you gift appreciated assets away to children, rather than giving them cash. Them giving it back to you is probably illegal.

But maybe my kids could buy a nice car with the proceeds, but let me drive it much of the time!

[ochotona]

I was thinking about the entire gold IRA question, and I was quoted a pretty high percentage for storage and custodian fee, together it worked out to about 1% of the gold value. Over 30 years of retirement, that's a devastating tax in and of itself. Assume for a moment that gold stays level in value, just for argument's sake, and a 1% fee will lose you 26% of your asset value over 30 years. I think I've heard people say safe depo boxes and insurance are much cheaper; I'm awaiting a quote from Hugh Wood myself at this time.

Maybe it's not so bad to pay the collectibles tax... the LOWER of your marginal tax rate or 28%. Because think of it... you will probably hold onto your gold until the last, and liquidate when you are at the end of retirement. You will very likely be in the 15% tax bracket, which is currently $73,800 for married filing jointly. That's what the LT cap gains rate is, 15%.

Maybe eat your Roth IRA before you eat your gold, and use the physical gold as the preferred way to pass on your wealth. Wouldn't your kids and grandkids prefer to inherit multiple ounces each of gold bullion? That would be a distinctive and memorable event!

I am also in casual discussions with my church about giving them physical bullion in the future; they've never accepted it, but are intrigued. I told them they have to wait for gold to appreciate in the future, then the parishioners (not only me) are going to want to do this, to shed the tax liability and do good work with their wealth.

[stuper1]

I'm pretty sure that if you leave the bullion to your church in your will, they aren't going to reject it.  They'll find a way to accept it.

For me, it will go to my children, along with detailed instructions on how to set up a Permanent Portfolio for themselves, if they haven't already.

[ochotona]

The more I think about it, the more I like physical gold as an end-of-life way to accumulate and transfer wealth. Your estate just "gives away" the collectibles tax problem by gifting to charities and heirs. So you personally never get taxed on the gold, and you still have the option of tax loss harvesting.