[Last updated May 2015]
The US Internal Revenue Service (IRS) levies up to 28% tax on capital gains from precious metal investments. State taxes can increase this to effectively almost 40% in some cases – one of the highest overall Capital Gains tax (CGT) rates in the world. US citizens are subject to the IRS tax regardless of where they live. Thus the popular route of changing residency for taxation purposes is unfortunately not an option for US citizens.
The following are strategies US citizens can employ to legally minimize CGT, as well as other costs and risks. This is complimentary to the basic strategy which is applicable to everyone and is outlined here.
(unless specified ounces or oz of gold here means equivalent combined value of gold and silver)
For portfolios <100oz gold:
- Buy gold and silver coins, bars and rounds with the cheapest ask premiums;
- Use a foreign safe deposit box;
- Re-locate to a precious metal friendly state;
- Use a bailment service to store some ounces internationally;
For portfolios >100oz gold but especially >500oz:
- As above plus;
- Buy a foreign residence and store some metals there. Buy preferably without a mortgage. If you must, sell some metals to achieve this;
- Consider a coin oriented self-directed IRA;
- Consider getting a new citizenship and renouncing your US citizenship;
- Very large portfolios (>500oz) should be mostly in LBMA bars in “full service” bailment, with some gold and silver coins kept at properties, safe deposit box(es), and some ounces in other “online” bailment services.
In this section
Re-locate to precious metal friendly state
The IRS considers physical gold and silver in any form equivalent to artwork, wine, and classic cars. They deem precious metals as a “collectible”. The IRS applies a higher top rate of 28% on so-called collectibles rather than the normal top rate of 20%. However, there is significant variation in how each state treats capital gains, and in particular capital gains on precious metals specifically.
Relocating to a precious metal friendly state is a good and realistic option for US precious metal investors. For example, a Massachusetts resident could escape that state’s 12% levy on gains on collectibles by selling her precious metals after she moves to say, Florida.
Arizona is another precious metal friendly state. The state legislature recently passed HB 2173 that recognizes gold and silver as legal tender and eliminates taxes on them. Puerto Rico offers interesting tax incentives (namely Act 20 and Act 22) and is another option for US citizens. See US capital gains tax for more information.
Foreign residence and safe deposit boxes
We strongly recommend that US citizens with a large (>500oz) or even a medium (between 100oz and 500oz) size portfolio should own a private foreign residence and store precious metals there. You should also store precious metals abroad in one or several safe deposit boxes. There is a list of international safe deposit box facilities in our Do-it-yourself storage section.
The main reason for this is because foreign real estate, safe deposit boxes and physical precious metals in your direct possession abroad are not reportable to the IRS. The new Foreign Account Tax Compliance Act (FATCA) says precious metals “held directly” outside of the US are not reportable on Form 8938 (or the older FBAR Form TD F 90-22.1 – see this table of rules). All types of safe deposit boxes are excluded from reporting requirements as well (see Q20 and Q22 here).
In addition, neither FBAR or Form 8938 indicate if foreign sales (or purchases) of non-reportable assets should be reported. If you decide to report the sale of non-reportable assets it is unclear as to what’s the appropriate threshold. Is it the $10,000 mentioned by FBAR or the $50,000 on Form 8938?
There is further lack of clarity on exactly what qualifies as a sale. The FATCA says report a “sales contract” if you sell precious metals to a “foreign person”. But what counts as a foreign person? For example, do you report every loaf of bread, vegetable or meat item you buy with silver coins at a farmers market?
Window of opportunity
The other reason we recommend this strategy is that, in our opinion, the window for moving your financial assets outside the US is closing. When the inevitable debt crisis hits, capital and currency controls will be put in place very quickly. The US would not be a favourable place for a physical precious metal investor. And you could face tax and legal issues in moving sufficient funds abroad to buy a property or anything else. If your metals are already securely abroad you have the options of keeping them, selling them, and/or renouncing your US citizenship to avoid the IRS entirely.
Having a private residence abroad will greatly assist whatever happens during a US domestic crisis. Consider selling some metals now if required in order to buy the property in full and with direct personal title. A foreign mortgage or property trust and all that entails may trigger a reporting requirement to the IRS. Many attractive countries have low/zero CGT and reasonable property prices. In Germany a quality well-located apartment can still be had for under $125,000. Costa Rica and Malaysia have interesting property-related expatriation programs worth considering.
Present US international tax rules are complex and at times seem contradictory. Our American friends have recommended Whitfield Adams Tax Advisors in Amsterdam for fee-based advice. Whitfield Adams can also advise on obtaining a European citizenship of some type. Also check out International Practice Group for listings of tax advisors. We’ve also heard good things about Taxes for Expats (TFX). (Note: we’ve never used these services so cannot recommend them).
Renouncing US citizenship
The number of Americans obtaining a new citizenship and then renouncing (sometimes called revoking) their US citizenship is low but has risen steadily over the last decade. For US citizens with a large portfolio of physical precious metals the potential savings from closing the door on the IRS is an extremely tempting proposition. We have heard positive things about the advice offered by TDVPassports (not a recommendation however)
Depending on your heritage and financial ability, claiming Irish, Canadian, UK, Italian, Polish and various Caribbean and many other citizenships is possible. Some relate to historical constitutional laws in those countries and may cost only an administrative fee while some are strictly economic policies designed to enrich the country. Dual citizenship (other than the US) is another powerful weapon in internationalizing oneself. For example, having a EU passport and a Canadian passport would be an extremely useful combination for legally avoiding CGT.
Before taking this step you should be aware of the Expatriation Tax (Form 8854). This is an exit tax for those renouncing their US citizenship. Perhaps more ominous, is the un-enacted so-called “Ex-Patriot Act” of 2012. If this proposed bill ever becomes law it could retroactively penalize ex-citizens for what it deems “tax avoidance intent”.
What’s the deal with numismatics?
All over the world rare and collectible precious metal coins have ask premiums well in excess of regular bullion coins. These are called ‘numismatic’ coins. Many are beautiful and fascinating objects but we do not recommend buying these types of coins for your physical precious metal investment portfolio – leave these to the professional antique dealers, experts and collector hobbyists. (See our section on recommended gold for the types we do recommend.)
For US citizens there are two important issues with numismatics:
Firstly, in the US there is a persistent myth that since numismatic coins were not confiscated under Executive Order 6102 they offer a greater degree of protection against any future confiscations or heavy-handed taxation.
In the early 1930s you could go into a Federal Reserve bank with $20.67 dollars and walk out with 1oz of gold – the value of a dollar was anchored to a fixed weight of gold. Most people complied with the confiscation and simply exchanged their legal tender gold coins for dollar notes. But they were allowed to keep numismatic coins held in museums and private collections. So there was a clear distinction back then between officially convertible money – such as a $20 dollars gold coin – and numismatics. This distinction doesn’t exist today so it is pure speculation what future actions the government might take.
Secondly, some dealers promote the pre-confiscation era $20 Saint-Gaudens coins, Liberty coins, and mint condition modern American Eagle gold and silver coins etc. as numismatics thus, they argue, delivering better investment returns.
Again, we disagree.
It times of economic stress all that matters is the gold and silver content of coins, bars and other items such as jewellery. In such periods discretionary spending falls and genuine numismatics may trade for only a small premium to their precious metal content. We would wager probably far less than in better times. And just like all precious metals numismatics are subject to CGT. Yes numismatic item are not reportable on Form 1099-B. But so what? Almost all bullion coins and bars are not reportable.
Bullion dealers are entitled to their opinions, but anyone giving a hard sell using these arguments is being disingenuous. Remember dealers make their profits on the bid/ask spread. If you’re interested in finding out more about the tax implications of numismatics, and collectibles and antiques in general, we suggest contacting a specialist like Vartian Law Office in California. If you’re genuinely interested in buying numismatic coins we suggest contacting the reputable David Hall Rare Coins in California.
US capital loss offsetting – wash sales
Although precious metals are taxed as “collectibles” they are treated as regular capital assets for capital loss offsetting purposes. US citizens with capital losses on gold and silver investments can use that to offset capital gains. And if losses exceed gains in a given year some of that can be deducted from taxable income and/or carried over into the following tax year. Making sure you use your capital losses effectively and keep your taxable income as low as possible are solid strategies to avoid the maximum 28% rate on capital gains.
According to this IRS document wash sale rules don’t appear to apply to “collectibles”. So if you bought precious metals at higher prices you may want to consider selling and immediately re-buying to avail of the capital loss.
All of this is general information and your mileage will vary. And of course everything is subject to the continuously changing tax laws. Consult a tax expert on the latest rules.
Premiums and foreign coins
Foreign coins (non-numismatics) are not the most common way to own gold in the US. American buyers seem to like Eagles and other domestically manufactured coins. As a result savvy buyers can very often pick up excellent world coins such as the Krugerrand (South Africa), 100 Corona (Austria), 1 and 2 Ducats (Netherlands), and 20 Francs (Switzerland) etc. with ask premiums less than 2%. These are ideal for storing in a foreign safe deposit box or foreign private residence.
It is true that some US dealers demand larger bid premiums to buy back foreign coins. This reflects the market preferences in their local area. But this is not always the case so shop around. If you do believe this will be an issue for you then we suggest storing your foreign coins abroad. In our experience, outside the US coin content and condition is pretty much all that matters. To the vast majority of dealers we’ve dealt with gold is gold whether it’s an American Eagle or an Austrian Corona.
Generally speaking, for gold and silver both ask (buying) and bid (selling back) premiums are relatively small in the US. Premiums on silver are especially good compared to the excessive premiums charged in places such as the UK. Silver rounds are actually ‘bars’ but in a circular format and usually have the smallest ask premiums, especially when bought in bulk. And US buyers don’t pay the excessive value-added tax (VAT) on silver like European buyers do. US-based physical precious metal investors would be wise to maximize these cost-saving advantages.
Transporting precious metals outside the US
US passport holders cannot bring gold coins to or from Cuba, Iran and the Sudans and a few others. Other than that, and as long as you comply with customs declarations and don’t break any commercial import or export rules, you can personally transport any amount of precious metals you like in and out of the USA.
However things may change in the future. And in our view they will not change favourably for the precious metal investor. We suggest you move your metals around while you still can. We have detailed information on internationally transporting precious metals here.