One of the more common questions when it comes to investing in precious metals is whether or not one has to pay taxes when selling their bullion at a profit. Here we will outline some of the general policies on precious metals taxation.

Holdings in precious metals such as gold, silver or platinum are considered to be capital assets, and therefore capital gains may apply. For tax purposes the IRS classifies precious metals as collectibles, which means a long-term gain on them is taxed at a maximum rate of 28 percent rather than at the standard long-term capital gains rates (26 U.S.C. section 1(h)).

One point is worth making early, because it surprises people. The exception in 26 U.S.C. section 408(m)(3) that allows American Eagles and certain bullion to be held inside an IRA does not carry over to capital gains treatment. Section 1(h)(5)(A) defines a collectible by reference to section 408(m) without regard to paragraph (3) of it, so metal that qualifies for an IRA is still a collectible when it is sold outside one.

It is important to note, however, that these capital gain taxes will not be assessed until one sells the metal. If someone bought 50 ounces of gold and the gold price has since risen, but he or she still owns the metal and it is held in a depository, then the capital gain has not yet been realized. It is the sale that creates the tax event, not the rise in value.

How Do I Know If I Owe Tax on the Sale of My Metals?

The first step in trying to determine whether or not a tax liability exists is to determine your cost basis, or original cost of the metals. Take a simple hypothetical. An investor buys 50 ounces at $1,000 per ounce, giving a cost basis of $50,000. If those same 50 ounces are later sold at $1,300 per ounce, the proceeds are $65,000 and the gain is $15,000. Those figures are illustrative rather than current market prices, but the arithmetic does not change with the price level: proceeds minus basis equals gain.

Some other special conditions may apply. For example:

Receiving Metals as an Inheritance:

Metals that are received as part of an inheritance use a different method for calculating the basis. In this case, the basis is equal to the fair market value of the metals on the date of death of the person who left them to you (26 U.S.C. section 1014). If the estate’s executor elects the alternate valuation date under 26 U.S.C. section 2032, generally six months after the death, the value on that later date applies instead. Our guide to passing metal down to heirs covers the practical side.

Receiving Metals as a Gift:

If you receive metals as a gift, your basis for calculating a gain is generally the same as the donor’s adjusted basis in the metal, which is usually what they paid for it. It is not the market value on the date you received it (26 U.S.C. section 1015).

A separate rule applies to losses. If the fair market value on the date of the gift was lower than the donor’s adjusted basis, then your basis for calculating a loss is that lower gift-date value. If you later sell at a price between those two figures, you have neither a taxable gain nor a deductible loss. IRS Publication 551 sets out both rules in full.

The bottom line is this: If you sell precious metals for more than what you paid for them, chances are pretty good that a tax liability will exist.

Potential Tax Rates on Precious Metals Sales:

Due to the way that precious metals are classified by the IRS, a higher capital gains rate may apply, but two things determine what is actually owed.

The first is how long the metal was held. Metal held for more than one year produces a long-term gain, and it is only long-term collectibles gains that carry the 28 percent maximum. Metal held for one year or less produces a short-term gain, which is taxed as ordinary income at the investor’s marginal rate and carries no 28 percent ceiling at all. A short-term gain can therefore be taxed at more than 28 percent.

The second is the investor’s own tax bracket. The 28 percent figure is a maximum, not a flat rate. An investor whose ordinary rate is below 28 percent pays that lower rate on the gain instead. The ceiling only binds those who would otherwise fall into the higher brackets.

Investors whose modified adjusted gross income exceeds the thresholds set in 26 U.S.C. section 1411 may also owe the 3.8 percent Net Investment Income Tax on the gain.

Do I Pay Taxes on Precious Metals As Soon As I Sell Them?

No. Capital gains from the sale of precious metals would be reported on your annual tax filing with all applicable information. Payment of the tax would also take place on an annual basis.

Separately from your own filing, a dealer is required to report certain sales to the IRS on Form 1099-B, but only where the product and the quantity sold meet thresholds tied to regulated futures contract sizes. Most retail-sized sales fall below them. Our guide to 1099-B forms covers which products and quantities are affected, and cash reporting covers the separate Form 8300 rules that apply to large cash payments. If you are selling back to a dealer rather than privately, dealer buy-backs explains how that works.

What If I Lose Money on My Precious Metals?

If one buys precious metals and ends up selling them at a loss, then no capital gain exists. In fact, the investor would now have a capital loss. This capital loss may potentially offset other capital gains within the same tax year or in future tax years. In addition, a capital loss may be used to offset ordinary income, subject to a limit: up to $3,000 per year, or $1,500 for a married person filing separately. Any loss beyond that carries forward to future tax years indefinitely until it is used up (26 U.S.C. sections 1211 and 1212). These are issues that should be discussed with one’s CPA or tax professional.

Taxes are an important consideration for all investors. This simple guide outlines some of the potential tax implications of selling precious metals. This is not tax advice, and we are not tax advisers. Always consult your CPA or tax professional for any tax related matters. Although we believe the data in this guide is reliable, we make no guarantee as to its accuracy.