Capital Gains Tax on Precious Metals
What is capital gains tax? Individuals who are holding physical precious metals as assets should always stay relevant to the latest legislations that might affect their investment portfolio. When participating in investment transactions involving precious metals, parties should be made aware that the US Internal Revenue Service (IRS) categorizes these assets as collectibles. Falling under the same category as stamps, artworks, antiques, and vintage wines, each of these are subject to capital gains tax.
As the primary objective of a capital gains tax is to encourage long-term investments, assets that have been held for more than one year would be subject to a lower tax rate capped at a maximum of 28%. On the other hand, assets that do not satisfy this requirement is subject to a higher tax bracket, known as the ordinary income rate or short-term capital gain rate.
How Is Capital Gains Tax Calculated?
Unlike other forms of taxation, the capital gains tax does not come into effect when an investor purchases the asset. Instead, it is only applied after the precious metal investment has been realized. As the name aptly suggests, only realized gains are subject to the capital gains tax.
To calculate whether a precious metal investment is subject to the tax, investors have to determine their potential returns. This is derived by finding the difference between the selling price and the initial purchase price (cost basis). A positive figure would indicate capital gains while a negative figure suggests that the investment resulted in a loss.
The capital gains tax is not paid immediately upon the sale of an investment. Instead, investors are required to report their capital gains tax when filing annual tax details, taking into account all of the investment transactions within that time period.
Precious metals investments can be conferred to other investors in the form of inheritance or gift. Under these circumstances, the law provides for specific exemptions. For precious metals received as part of an inheritance, the potential capital gain is calculated by using its market value on the date of the death of its original owner.
If precious metals are received as a gift, the value of the asset used is determined through a two-step process. If the previous owner is able to realize capital gains by selling the assets instead of giving it away, the initial purchase price is used as the market value. If the current market value is lower than the initial purchase price, the new owner must use the lower value instead. In general, the lower market value between both dates is the new basis for the new owner.
In the unfortunate event that an investment results in a capital loss, the IRS allows investors to use this figure to offset other investment’s capital gains. This will help to reduce the total capital gain that is subject to taxation.
The issue of taxation is an important consideration for all investors. Neglecting to report taxes, such as capital gains tax, would cause an investor to fall foul of the law and subject himself to legal repercussions. In situations where the capital gains are almost insignificant, taxation could potentially offset any gains and render the investment a failure instead. Given the far-reaching legal and monetary consequences of taxation, investors are better off consulting with certified professionals to ease their doubts and enjoy a peace of mind.