How Do Capital Gains on Gold Work?

November 20, 2022November 20, 2022 Stephen

Are you beginning to invest in physical silver and gold and other precious metals? Are you starting to worry about the tax consequences? It’s definitely something to think about before you begin diving into this investing strategy.

There are a number of different investors that like owning physical silver and gold as opposed to ETFs when it comes to investing in precious metals. While there are certain straightforward tax implications regarding selling and owning ETFs, there are few people that truly understand the tax implications regarding physical gold bullion and the sale and ownership of these investment vehicles.

If you keep reading below, you’ll discover how gold and precious metals investments are taxed, and you’ll also learn about cost basis calculations, tax reporting requirements, and offsetting tax liabilities when selling precious metals.

Selling Physical Gold and Silver & the Tax Implications

Owning physical precious metals including silver, gold, palladium, platinum, and even titanium is known as capital assets according to the Internal Revenue Service. These assets are specifically known as collectibles according to the IRS.

By having physical holdings of these particular metals, even if you own ingots, rare coins, or bars or coins made of bullion, it’s safe to say that each one of these investments is going to be subject to capital gains tax. But capital gains tax does not kick in until you actually sell your physical investments. And if you sell the coins prior to owning them for a year, you do not have to pay capital gains tax. But if you own the coins for more than a year, you are required to pay capital gains tax according to the IRS’s rules.

Even though other financial securities that are tradable including ETFs, mutual funds, and stocks are also required to pay short-term or long-term capital gains taxes, selling physical precious metals including gold, silver, platinum, or palladium has a slightly different tax structure.

By owning physical gold and silver and other precious metals, they become subjected to capital gains tax that’s also equal to the marginal tax rate, with a maximum amount of 28%.

What does this mean? If you are in a higher tax bracket of 33%, 35%, or 39.6%, you are still only required to pay a 28% capital gains tax on the sale of precious metals. To pay short-term capital gains, on the other hand, it’s subjected to ordinary income tax rates.

Requirements for Reporting

You are not instantly required to pay the tax liabilities on precious metals including silver, gold, palladium, or platinum as soon as the sale is eventually made. On the contrary, when you sell physical precious metals including silver and gold, you must report the sale of these precious metals on your tax return on Schedule D of Form 1040.

Depending on the precious metal type of the item that you sold, you’ll also need it to submit form 1099-B and submit it to the Internal Revenue Service when you initially make the sale, since this sale is known as a form of income.

The items in particular that must be filed include those with a $1000 face value of silver US coins made of 90% Silver, half dollars or quarters, Gold Maple leaf coins that are 1 ounce, along with gold Krugerrands and Mexican onza coins that are also made of gold and or 1 ounce. Silver and gold bars that way 1000 Troy ounces or 1 kg also require a filing of form 1099-B.

If you sell an American Eagle Gold coin, on the other hand, you aren’t required to file form 1099-B. When you sell these coins, you’ll have to pay the tax bill at the time that you pay your ordinary income taxes because it’s due then and it’s considered ordinary income.

Physical Gold and Silver Cost Basis for Taxes

When you sell your precious metals, figuring out how much tax is owed on the proceeds of the sale will depend on the specific precious metals cost basis itself. If you had made the purchase of the precious metals on your own, then your cost basis is the exact amount that you paid for each precious metal.

The IRS will allow you to add specific costs to the overall basis, which could potentially reduce your tax liability later on. Some items, such as adding in the cost of an appraisal, can improve your cost basis.

There are two scenarios to take into consideration when figuring out the cost basis of physical silver and physical gold.

For starters, receiving the precious metals as a gift, in one example, means the cost basis is equal to the market value not on the day that you receive the gift, but on the day that the gift giver purchased the gift.

For example, if the purchaser paid more for the gift than the market value on that specific day, then the overall cost basis is equal to the market value on the particular day that the gift was received.

In another scenario, those inheriting silver and gold have a cost basis that is equal to their value on the day the person passes away.

An Example and Possible Offsets

In this example, please imagine that you purchased 100 ounces of gold at today’s spot price, which is $1778 per ounce.

In two years, your gold investments are now worth $2000 per ounce. Let’s also say that your current tax bracket is at 39.6%. The following is your tax scenario: