[Last updated January 2015]
Capital Gains tax is the numero uno tax issue for private sellers of physical precious metals.
In this section
The bad news
The bad news is that most governments do not consider gold and silver to be special in any way. With few exceptions (see our tax tables here) gold and silver are considered investments like equities, bonds or real estate. Therefore any profits arising from the disposal of your physical gold and silver coins and bars is liable to whatever your rate of Capital Gains tax (CGT) happens to be at the time. Profits are calculated as the selling price less your original cost or ‘basis’. Even worse, if you don’t have a receipt for those coins or bars you bought years ago then your basis will be zero and all of the proceeds may be liable for CGT.
Is there any good news?
Well, you will note our emphasis on your CGT rate in the paragraph above. You can change your rate by internationalizing your financial self to a low or zero CGT jurisdiction. US citizens will have a harder time trying to avoid Uncle Sam’s reach as they are taxed on global income regardless of where they live. See our section on strategies for US citizens.
Of course, like other investments your CGT liability can be reduced by offsetting capital losses against capital gains. Some countries such as the UK even have specific CGT allowances (the UK also exempts some types of coins from CGT). In most countries your CGT liability is not a standalone fixed tax, it is a function of your total taxable income. Therefore spreading your taxable income and profits over several years, and several lots of allowances if applicable, is a common approach to minimizing CGT.
Capital gains and tax liability – the basics
Details vary from country to country but the central idea of capital gains and CGT is the same everywhere. In order to understand how to minimize CGT let’s first define what a capital gain (or loss) is. Once we’ve done that we can then look at how CGT is assessed on that gain. Capital gains or losses are calculated as follows:
‘Basis’ is what you paid and can be adjusted up or down for arcane reasons best left to accountants. In addition, your basis can also be ‘re-based’. Moving your basis higher is the first step to minimizing your CGT liability. The bottom line is, a higher basis means smaller capital gains which means less CGT.
You may have gains and losses on several investments in a given tax year resulting in you having a total capital gain figure and a total capital loss figure. Both of which are used to calculate your CGT liability. Your CGT liability is calculated as follows:
Your CGT liability is added to your taxable income. Thus, your CGT becomes a function of your total taxable income. CGT liability is usually paid with your normal income tax filing, not at point of disposal. If you are a high income earner expect to pay the top rate of CGT.
Some countries make a distinction between short term and long term capital gains and losses depending on how long you had the investment and apply different CGT rates. The cut off point is usually 12 months. If your CGT liability is negative some countries allow you to decrease your taxable income. Your CGT liability can sometimes be spread over previous and future years. There are also allowances and reliefs in some countries to help get your CGT liability amount down. All these details are best left to a competent tax accountant.
What about tax shelters?
In our view, there are very few conventional avenues for sheltering profits arising from precious metals investments while at the same time keeping the metals in your direct title and ownership. There are innumerable off-shore type vehicles which may be worth looking into. But we’ve never seen one where title of metals didn’t transfer to a trustee or custodian.
You didn’t think investing in physical precious metals was going to be easy did you?
At PRECIOUSMETALTAX.com we generally don’t consider ETFs, mutual funds, gold deposit accounts, certificates or any “unallocated” or “pooled” accounts as investments in physical precious metals. And these are typically the type of entities that can and do go into special retirement plans or tax deferral / shelter schemes. We don’t consider these physical investments because they introduce counter-party risk; at some point ownership of the metal passes away from you to someone else and you get a receipt of some sort in return. Please see What is a physical precious investment? for more about our views on this subject.
If you insist, there are things you can do to put physical precious metals into a tax-sheltered vehicle and still retain complete direct title and ownership. Since we are not tax experts we have decided to focus on the two schemes we are most closely familiar with. These are Self-Directed IRAs in the US and the SIPP scheme in the UK. See here for our review of the Self-Directed IRA option for people with US income.
UK residents → Self Invested Personal Pension (SIPP)
A SIPP allows anyone with UK taxable income to put London Bullion Market Association (LBMA) accredited gold bars into a tax efficient shelter. Contributions to the shelter help minimize annual income tax while investment gains inside the shelter are CGT free. A range of rules apply for drawing down the SIPP from 55 years of age and older. At present these are generous and tax favourable.
As long as the SIPP is set up via an individual trust – with a co-trustee for purely administrative purposes – a SIPP can allow investors to retain direct title and physical control over their gold. Unfortunately with any other set up ownership of your gold goes to the trustee. Thus we only recommend the individual trust set up. We cannot stress this point enough and would also point out that most SIPPs are not set up the way we recommend.
We also note the existence of another related tax shelter vehicle for UK residents called a Small Self Administered Scheme (SSAS). We are told this is similar to a SIPP but designed for groups of individuals.
An obvious disadvantage of a SIPP/SSAS is that coins or smaller bars are excluded. Silver in all forms is also not allowed. To set up a SIPP/SSAS the way we recommend contact GMS or PhysicalGold for more information, however neither company are a recommendation. If you absolutely insist on putting gold into an standard (trustee owned) existing or new SIPP/SSAS our recommendation would be BullionByPost. In their favour they use Brinks to vault your metals, they’re a highly reputable bullion dealer, and their premiums and storage fees are by UK standards very reasonable.
Finally, while we do recommend UK-based GoldMoney and BullionVault for bailment/storage we cannot recommend them for use with a SIPP. This is because (as we’re led to believe) the way these must be set up is ownership of your gold transfers to the SIPP trustee. So once again you are reliant on a counter-party, which is precisely the risk you’re attempting to avoid by owning precious metals in the first place.
A word of caution
You can probably read between the lines here that we are not huge fans of tax-sheltered vehicles for avoiding CGT on physical precious metals. Besides the expense and complications of setting them up in non-standard ways so as to avoid counter-party risks, there are two general reasons for this. Firstly, the rules can be changed in any way and at any time. And secondly, it removes much of the anonymity associated with this type of investment.
In the first case, if the tax rules are arbitrarily changed to disfavour investing in gold and silver you will be subject to the new rules whether you like them or not. For example, what is to stop your government declaring that gold and silver can no longer be held in tax shelters? Or they can held within tax shelters but are subject to a mandatory special levy when you take them out?
In the second case, declaring your investments to the tax authorities now may hinder you ability to internationalize yourself later. For example, what is to stop your government retroactively imposing CGT / special levy on precious metals you used to have in your home country?
In our view, there are better ways to avoid or minimize CGT such as by internationalizing your financial self. As well, a bit of forward planning as to how, where, what and when to convert your metals into something else will also contribute greatly to minimizing your future CGT liabilities. We cover the latter in our section on Strategies.