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When you buy or sell gold, you have to pay tax. We don’t like it and don’t want to do it; however, the law is the law, and we have no choice but to.
After paying tax for buying Gold, every prospective seller dreams about selling their gold without paying tax. Taxes affect the overall profit, and if the market is not doing well, a rarity but still probable, you might end up selling your gold for less than you bought it.
Is there a way to avoid taxes when selling your Gold? There are two ways to sell your Gold without tax implications; 1031 exchange and Roth accounts.
I will discuss these methods and everything you need to know about them later in this article. But first, let’s look at the tax implications you might incur when you sell gold.
Tax Implication On Selling Gold
While you might not be taxed for owning gold, you will be taxed for selling it. IRS considers the sake of gold as an income stream, so you must report the sale of gold on the appropriate form.
Gold is considered a collectible and will be taxed based on the total price of the gold. However, the tax on gold isn’t as simple as that. Many factors influence the amount you pay.
Some of the factors include:
- How long you have had the gold.
- The form of gold you have.
- The State laws governing your area.
- Your trading account.
- How you invested the gold.
How Long Have You Held The Gold?
How long you have held your gold will influence how much tax you pay on your gold. Because gold is considered a collectible, it is also considered a capital asset which means that you have to pay Capital Gain Tax whenever you sell them.
However, Capital Gain Tax is only applicable when you hold the gold for more than a year. You are not liable to pay this tax if it is not up to a year. Capital Gain Tax applies to rare coins, bullion bars, ingots, and coins.
What Form Of Gold Do You Want To Sell?
When making tax declarations, you must fill in the type of gold you sold in the appropriate parts of the form. The type of gold will also affect how much you pay as tax.
Some forms of gold you can buy and sell include:
- Digital Gold
- Gold Funds
- Physical Gold and Bullions
Although the tax implications for all these forms of gold are not the same, you still have to pay tax if you sell any of them for money.
What Does The Law Say?
Before evading the tax implications of selling your gold, you need to understand the gold taxation laws in your State.
Are there laws about taxes on collectibles? Do you use any form of gold as currency? If this is the case, investing in them is tax-free regardless of the quantity you buy or sell.
Depending on the State you are in, you might have to pay more or less tax for your gold investments. The IRS is in charge of the 1099B reports, but different States also have different Gold sales tax laws.
Form 1099B is important if you want to sell gold in America. It tells the IRS that you are not selling gold as a business. The IRS also has several guidelines for reporting gold sales, including the size you need to sell before filing a return.
Understanding these laws is the first step towards successfully avoiding taxation each time you pay your gold.
So What Are The Tax Implications?
We have established that gold is considered a collectible, which means that if you hold gold investments for more than a year, they will be taxed as ordinary income with a maximum collectibles tax rate of 28%. This is the same as short-term capital gains.
The implication is if you are in the 15% tax bracket, you will have to pay a 15% tax on all your gold sales, but if you are in the 35% tax bracket, you won’t go above 28% on gold taxes.
So How Do You Sell Gold Without Paying Tax?
So with all these, you can see how it can become overwhelming to pay tax each time you sell gold. You paid tax when you bought the gold, and now that you want to sell it, you have to pay tax again.
Well, not necessarily. You see, you can avoid paying tax when you sell your gold. And I am not talking about circumventing the laws here. There are legit, law-abiding ways to avoid paying taxes on gold sales.
The IRS approves these methods I am going to list below:
1. Postpone Your Tax
A method you can use to avoid paying tax on your gold is to postpone them. This is possible through the 1031 IRS exchange.
The 1031 IRS exchange is a section of the IRS documentation that states that you can exchange property or assets for property or assets of the same kind without accruing any tax implications.
If you buy gold with the capital gain you made from selling gold, you do not have to pay tax yet. You can continue making these transactions and postponing your tax until you sell your gold for cash.
1031 exchange is a great way to avoid tax implications, but in the end, you will still have to pay your tax. Let’s look at some important things about this method of avoiding tax and its pros and cons.
Things You Should Know About 1031 Exchange
- The gold you want to exchange must have been used for investment or business purposes only, or they do not count.
- You must also buy the replacement assets within 180 days, or they will not count as a 1031 exchange.
- Once you have gotten the replacement assets, you must identify them with the IRS before 45 days are up.
- If you get a replacement asset below the price of the gold you sold, it is referred to as a boot. Boots are taxable.
- Even if you mortgaged the asset, you could still use a 1031 exchange.
Pros Of Using 1031 Exchange
- It is a great way to accumulate gold without any tax implications.
- You are deferring the tax until you exchange the gold for cash, which means you do not have to worry about the significant effect of taxes on your investment.
- You will have more cash to invest in gold as you do not have to pay taxes now.
Cons Of Using 1031 Exchange
- 1031 exchange does not mean that you are tax-free. You are only postponing your tax, and the moment you decide to sell your gold for cash, you will have to pay your tax.
- The 1031 exchange has a lot of rules to follow. If you follow the rules, you will successfully defer your taxes, but if you ignore them, you will have to pay taxes and might incur penalties.
- You must find a replacement for your gold and report it to the IRS 45 days after selling it. There are no extensions; even after finding this replacement, you must acquire it before 180 days. This is difficult for most people.
- As long as you defer your taxes, you defer your losses along with them.
- If there are any future tax increases, then you will be affected by the new tax rates.
What Should You Do?
If you decide to use this method to sell your gold, ensure that you work with a seasoned professional. There are many rules and different ways you could go wrong. If you make any mistake, you might end up with taxes and penalties.
A professional will help you keep to the regulations and ensure you get a replacement quickly.
2. Using Self-Directed Roth Retirement Account
You can sell your gold with your retirement account without incurring taxes or legal penalties.
These retirement accounts are a great way to increase your investment portfolio because the type of assets you can keep in them are the type you are not allowed to keep under your regular retirement account.
You won’t be taxed if you sell the gold you have kept under these retirement accounts. A trustee maintains your Roth account, but you have direct control over all the operations on the account.
A great advantage of the Roth retirement account is that the value of the assets kept increasing without any tax implications.
The process of opening a self-directed individual retirement account is quite straightforward. A certified IRA custodian will handle most of the work for you.
When looking for a custodian, you should understand some things:
- An IRA custodian is not allowed to give you financial advice. They will only follow the instructions you give them.
- Because they do not offer professional advice, it is up to you to do your research and make the right decisions regarding the account and what you want to do with it.
- Ensure that the custodian you use offers gold as an investment option because not all IRA custodians do.
Find a custodian that holds gold and have them hold on your behalf. Anytime you want to sell your gold, you contact them and provide them with the necessary information.
Using a Self-Directed Roth retirement account comes with many undeniable advantages, but they also come with their fair share of risks.
Some of the risks to look out for include:
Failure To Follow The Rules
Certain rules and regulations guide Self Directed IRAs and the transactions you can perform with them. You must follow these rules when transacting with these accounts or risk tax implications or penalties.
For example, you can’t lend money to yourself or relatives when using this account. The IRS also has the right to prohibit transactions if the gold you use isn’t pure. They also hold the right to charge you taxes and other penalties as the law deems.
Opening a Self-Directed Roth retirement account comes with several fees.
Some of the fees you will have to pay include:
- Establishment fees
- First-year annual fee
- Investment bill-paying fees
- Renewal fees
When you add up these fees, you might realize that your earnings from selling your gold have decreased by a bit.
High Fraud Rate
You have to be careful when dealing with custodians because not all of them are allowed to offer gold as an investment option. Some of them may still offer the option to you. If you work with these custodians, you could potentially lose all your money.
Look for a legitimate custodian offering gold as an investment option and conduct proper research before creating an account so you do not lose everything.
Creating a Self-Directed Roth retirement account is easy, but getting out isn’t as easy as we might want it to be, so exit plans are necessary. Ensure the custodian you choose has the options for exit and research the different exit plans available.
Also, watch this video to learn what he says about the tax on gold:
You should never make selling decisions based on tax implications. You only pay tax if you make a profit, so do not buy and sell gold using the methods I have listed here in the bid to make a quick profit.
Gold has proven over time that it is a great investment option and an effective hedge against market crashes. Use your gold to protect your portfolio. But if there comes a time when you need to sell gold, then try out these two options.