Effect on personal taxation of gold transactions to businesses that buy/sell gold?

I apologize for not posting in some while – I took a much needed vacation to the West Coast and enjoyed my time out in the So Cal area thoroughly. While I was gone I received a couple of reader questions which I will answer over the next couple of days, and then I will get back to personal finance basics as promised. Check out my most recent reader question from Mary.

Dear Finance Dad;
In 2004, I rolled over part of a retirement annuity into Palladium. The initial investment was $50,000. In December 2007, I rolled over approx. $83,000 total of the Palladium acct into Gold Coin. Unfortunately for me, the transaction was completed in February of 2008, when the cost of gold was at a peak that year (but Palladium was also rising). Initially I was dusted a bit on that transaction, but it is now slowly increasing and as of June 30 of this year the value is now $94,900. This investment represented half of my total retirement accounts (the initial amount into palladium). I feel it has done very well. I am close to the end of my work years, having worked 40 years at this point.

My question to you is, what do you feel the effect of the Obamacare clause re: taxation on gold transactions to businesses that buy/sell gold will affect me? I am surely feeling the bottom line of the food chain (moi), will probably be nailed on any transactions that I will be making out of that gold IRA. Would it be adviseable to close out the account prior to the initiation of the taxation law, and simply roll over the money?

I hope this made sense. 50% of my total life retirement was invested into the initial palladium IRA, and although it was a good move, I am beginning to panic.

Please advise.

Thank you in advance.

Sincerely,

Mary

First off, thanks for your question Mary, I will try and address it and some other concerns I have after reading your story. But please keep in mind, I’m only providing my opinion on this matter, and that doesn’t mean it’s right for you. I’m going off of very limited information and my answer should only be taken as one man’s opinion and nothing more. You should seek professional advice from a certified financial planner or similar.

For some background on what Mary is talking about:

According to an ABC news report, the new 1099 provisions in the health care bill, which will force business owners to declare all purchases over $600 on their yearly tax return, will also directly affect the sale of gold coins and bullion:

Section 9006 of the Patient Protection and Affordable Care Act will amend the Internal Revenue Code to expand the scope of Form 1099. Currently, 1099 forms are used to track and report the miscellaneous income associated with services rendered by independent contractors or self-employed individuals.

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.

So every time a member of the public sells more than $600 worth of gold to a dealer, Piret said, the transaction will have to be reported to the government by the buyer.

The new legislation works in both directions to track the buying and selling of gold.

Essentially, any transaction over $600 will be logged buy the dealer, whether you buy $600 or more worth of gold, or sell it back to the dealer.

The article then proceeds to give some reasons to be concerned beyond the possibilty of taxation.

Since the transaction will require a social security number (or federal employer identification number) to be logged at the time of sale or purchase, this new legislation gives the government the capability to track every single precious metals purchase (over $600)  in the country.

While the legislation implies that taxation of such transactions to generate additional revenue is the goal, precious metals buyers, who generally like to remain anonymous, will most certainly see that the real issue in this instance is not taxation, but the ability to track who owns the gold.

When the US government ran into money problems in the 1930’s, Franklin Roosevelt confiscated all gold held in the hands of the public, and those who refused to give up their gold were either fined or imprisoned. Incidentally, the communists in Russia and eastern Europe did the same thing throughout the 20th century, but those penalties went a bit further than just imprisonment.

With a US dollar currency crisis and a US federal government debt crisis looming, many precious metals investors are concerned that similar government action may be instituted in the future.

Though it has been argued by many that confiscation in the US would not be necessary or feasible, the 1099 legislation certainly makes it easier to identify who has the gold.

Of course, those who purchase prior to January 1, 2012 will be “off the books,” until that time when they attempt to sell their gold to a registered dealer who will be required to log the transaction.

There’s a reason economist Marc Faber advised clients that they should hold their gold outside of the US.

Historically, when the economic or political shit hits the fan, governments have always moved to seize precious metals from the citizenry. The Nazis did it in World War II. The US did it in the 1930’s. The Bolsheviks did it in 1917. Rome did it by removing 90% of the silver from their coinage.

It is conceivable that, because of global economic problems, governments like the US, China and EU may once again make a move to “repatriate” the gold belonging to their citizens. Even if this is avoided, the tracking capabilities that have been provided for in the Obama health care legislation now give the government the ability to know exactly who buys how much gold, as well as an easy tracking mechanism for taxing the transaction. Rather than confiscating your gold, they may simply tax your profits at 95% at the point of sale, virtually wiping out the very reasons for why an investor buys precious metals to begin with.

This is why we advocate a diversified strategy for gold investing and wealth preservation that includes not only the acquisition of bullion here at home, but if you have the capability, international storage of physical metals (i.e. Singapore, Australia via Perth Mint, Hong Kong, South America, etc.). Though you may lose some gold in the event of a confiscation or extreme taxation in one country, you may be able to retain some wealth internationally. We also recommend looking into the purchase of gold equity ETF’s like the Market Vectors Gold Miners (not commodity ETF’s like GLD) that give you direct shares of some of the top gold companies in the world.

And of course, for those without the ability to invest internationally, buy off the books while you still can and keep your gold out of sight of potentially prying eyes. Once the $600 reporting period begins, be sure to change dealers regularly, as the $600 is a yearly accrual based on the social security number or federal EIN.  The other option after January 1, 2012, of course, is to keep your purchases and sales under $600. This can be achieved with fractional gold coins (though the price of gold may rise significantly taking these above the $600 threshold as well) or one ounce silver coins which trade for significantly less than gold.

By Mac Slavo
http://www.shtfplan.com/

Mac Slavo is a small business owner and independent investor focusing on global strategies to protect, preserve and increase wealth during times of economic distress and uncertainty. To read our commentary, news reports and strategies, please visit www.SHTFplan.com

While I think the above article gives Mary reason to be concerned, I would argue that this new law is the least of her concerns. The fact is, her portfolio being 50% invested in gold scares the heck out of me at her implied age. If I’m guessing correctly, Mary is probably in her late 50’s or early 60’s, and she’s taking way too much risk for her age. At this point in life Mary should be concerned with asset preservation versus wealth accumulation.

Precious metals are far too volatile to have half of your nest egg in when you’re nearing retirement. I would agree with this article in saying that I wouldn’t have more than 5-10% of my portfolio tied up in precious metals. The fact is, if I were just a few years away from retirement, I would have certainly less than 5% of my portfolio invested in gold and other precious metals. Having said that, Mary, get out of those risky investments and look at transitioning your portfolio over to more bonds (specifically TIPS), where the risk is much lower, but the reward is being able to keep the money you’ve accumulated. I’m not sure what the other 50% of Mary’s portfolio is invested in, but it certainly couldn’t be diversified enough to outweigh the risk of the other half of her portfolio.

I hope this helps Mary!

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2 Comment

  1. The easiest way to sell it is at your local jewelery shop. They will melt the coin to inspect it for purity. Ask for a receipt when accepting payment. Details of weight & price will be listed there.

  2. Christian Go says:

    Great Article. Thanks for the info, super helpful. Does anyone know where I can find a blank “Form 1099s” to fill out?

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