Whether you are an entrepreneur or an on job individual, owning precious metals in a retirement account is pretty popular these days. They can be a safe asset that act as an effective hedge against inflation. You own it in its physical form and best of all, it adds some sorely needed peace of mind during these uncertain markets.
While these benefits are undeniably great, most people don’t give enough consideration to the tax implications that come from selling the bullion coins or bars from your holdings.
As you can expect, these alternative investments are treated and taxed a little different than your ordinary stock and bond investments. When you take into account the way you actually hold the metals, the confusion factor tends to increase.
Read on to get some simple, but common facts that people usually get wrong about investing in precious metals.
Why do I have to pay taxes on precious metals?
The IRS considers the four types of IRA-approved precious metals (gold, silver, platinum, and palladium) to be capital assets, specifically, they classify them as collectibles. Collectibles are considered more valuable than regular capital assets and thus are taxed at a higher rate.
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Regardless of whether you own them in bullion bars or coins, the tax liability is only generated at the time of the sale.
What type of taxes do I owe on my investments?
Taxes are generated at the time of the sale of your precious metal holdings. If you owned the assets for less than a year, then the sale would be considered a short-term capital gain/loss. Short term sales are taxed as ordinary income
On the other hand, if you held the asset for a year or longer you would generate a long-term tax rate. Since investing in precious metals is more of a long-term strategy, most people end up paying the long-term tax rate, which is higher with a maximum tax rate of 28% at the time of this writing.
Fortunately, you can reduce your overall tax bill by using any short or long term losses against their respective short or long term gains.
Receiving precious metals as a gift
Calculating the tax bill on the sale of a gold position entails a slightly different calculation. However, getting your tax bills wrong can end up in costly and time-consuming encounters with the IRS.
The calculation takes into account the market value at the time the metal metal was originally purchased. The tax rate generated will depend on whether or not the market value at the time of the original purchase is higher than today’s value.
All in all, if you come out with a gain, you can assume you will generate a tax bill.
Tax rules on precious metals investing may leave one’s head spinning. But reading up about it will certainly help you realize that it is not actually as complex as it looked at first.
Being an informed investor always helps, but it doesn’t make you a tax expert. This is why you should always hire the services of a professional CPA or tax advisor to guide you through the ins and out of how precious metals are taxed and how they can affect your overall investments.