What you should know about how taxes affect capital profits and losses of gold, silver, platinum, palladium, and copper sales
When first-time precious metals investors buy their first pieces of gold, silver, platinum, palladium, or copper, they rarely think about how they will be taxed if and when they eventually sell those physical investments.
Nevertheless, just like any other kind of investment, profits made from investing in physical precious metals are subject to taxation.
Here’s what you need to know about paying taxes on your precious metals investments.
When you buy a physical precious metal, such as a coin or a bar, you are purchasing what’s known in tax terminology as a “capital asset.” Simply put, this means the item you purchased is an investment—in this case, classified as a collectible—on which profits may one day be transferred to you. As long as you hold that store of metal, you will not have to pay any taxes on it. But if you decide to sell it down the road, the amount of profit you receive from the sale will be considered as a form of taxable income.
For this reason, it is extremely important that you maintain an accurate record of the price you pay for your precious metal investments, as this information will be necessary to calculate your profits and taxation later on.
One important exception to the taxation of precious metal sales is when you sell at a loss. Though it certainly isn’t advisable to sell your precious metal investments when prices are down, there are circumstances in which it may be necessary.
Suppose, for instance, you purchased physical silver in April of 2011, when spot prices reached an historic high of over $47 an ounce. If you then needed to sell that silver to cover unexpected expenses in July of 2013, when prices dropped below $20 an ounce, the difference between the price you paid and the price you earned from selling would be counted as a tax loss.
That loss could either offset taxes you owed in that year, or be classified as a tax carryforward for future years. In either event, you would not owe any taxes on the money you received from the sale of that silver because only investment profits are subject to tax.
Some states have recently attempted to do away with capital gains taxes on precious metal investments. Arizona and Idaho passed laws in 2017 eliminating taxation of gold and silver bars and coins in those states. Utah and Oklahoma have also enacted similar tax measures, while Maine, Alabama, and Tennessee are taking actions to remove precious metals from the sales tax.
When you sell precious metal at a profit, it’s important to understand how that profit will be taxed. In order to calculate the amount of money you owe taxes on, start by subtracting the price you paid for the metal from the amount you sold it for. This difference is considered to be the gross profit you made on the sale. However, other factors, such as the cost of having the metal appraised, may also be subtracted from the final sale price to lower the amount you have to pay taxes on.
Since precious metals are categorized as an investment, the profits you receive from the selling are subject to a type of tax known as “capital gains,” rather than standard income tax. Capital gains taxes are applied to investments of all types, including stocks and bonds. Because investment profits are classified in a distinct tax class from regular income, the percentage of taxes you pay on your personal investments may be different than the percentage paid on your regular income.
In the case of precious metals, however, the percentage of capital gains tax required by the federal government is equal to the amount you pay on your income—unless you are in a tax bracket subject to taxes of more than 28 percent.
If you are in the top tax bracket, for instance, your income would be taxed at 37 percent, but your profits from the sale of precious metals would still only be subject to a maximum 28 percent tax rate. If you fall into the 24 percent tax bracket, on the other hand, your profits would be taxed at an equivalent 24 percent.
The main tax advantage of selling your precious metals or some other capital asset is the fact that the income you receive is not subject to payroll or FICA taxes. When you earn income through working, both you and your employer are taxed for Medicare, Medicaid and Social Security. These taxes are usually taken directly out of your paycheck. The employee portion of this tax burden is 7.65 percent, calculated prior to any other taxes being applied.
In the case of capital gains tax, however, FICA taxation is not applicable.
Precious metals also have a tax advantage over another major physical investment: real estate. While you hold a piece of real estate, it will be subject to annual property taxes. This means that unless you are actively earning money on that piece of property, the real estate will result in a negative cash flow.
In the case of precious metals, however, taxes only apply when you sell. While a piece of gold, silver, platinum, or palladium is in your keeping, it is entirely exempt from taxation.
A quick disclaimer:
Taxes should be an important consideration for all investors when buying precious metals. While this guide describes a few of the possible tax implications of selling your gold or silver, this is no substitute for professional tax advice. We are not tax advisers. Consult your CPA or tax professional regarding any tax-related matters.