Avoiding the Tax Consequences of Selling Gold and Silver with a 1031
Selling gold bullion, silver bullion, gold bar or coins, can incur capital gains taxes. If you are planning on selling gold bars, bullion or coins, however, the transaction may qualify as a 1031 exchange, allowing you to defer the capital gains incurred in the transaction. To qualify as a 1031 exchange, you must exchange the gold or silver for something of “like-kind” within 180 days of the sale. The key here is what is considered “like-kind” by the Internal Revenue Service.
Unallocated Gold for Allocated Gold
For example, let’s say that you made an investment in unallocated gold bullion or silver bullion 15 years ago. Unallocated gold bullion is essentially an ownership interest in gold bullion in general, while allocated gold bullion is ownership in a specific gold bar. Allocated gold, therefore, must be physically held for you whereas unallocated gold is represented as a debt to you without the need to actually store the gold. For this reason, unallocated gold bullion is less expensive than allocated gold bullion.
Imagine that you now wish to convert your unallocated gold or silver bullion into physical gold or silver. Any conversion to US dollars is a taxable event which may incur capital gains taxes. If, however, your conversion qualifies for a 1031 exchange, those capital gains can be deferred. Remember that in order to qualify for a 1031 exchange, you must purchase like-kind gold or silver within 180 days. Unallocated gold exchanged for allocated gold may qualify as they are within the definition of “like-kind“, but other transactions are not as clear.
Coins for Coins and Bullion for Coins
For example, the exchange of U.S. $20 gold coins (numismatic-type coins) for South African Krugerrand gold coins (bullion-type coins) was disallowed by the I.R.S. while the exchange of gold bullion for Canadian Maple Leaf gold coins was allowed.
In the first instance, the IRS noted that the coins "represent totally different types of underlying investment, and therefore are not of the same nature or character. The bullion-type coins, unlike the numismatic-type coins, represent an investment in gold on world markets rather than in the coins themselves." Revenue Ruling 79-143, 1979-1C.B. 264.
The exchange of bullion for Canadian Maple Leaf gold coins was found to be an exchange of like-kind "Because the value of the gold content in each Canadian Maple Leaf gold coin greatly exceeds its face value, it is not a circulating medium of exchange. Therefore, the Canadian Maple Leaf gold coin is property rather than money for purposes of section 1031(a) of the Code. Because the Canadian Maple Leaf gold coins are bought and sold for their gold content, they are bullion-type coins.” Revenue Ruling 82-96.
Many transactions that include the sale or purchase of gold or silver bullion may qualify for a 1031 exchange deferral; however, the unique facts and characteristics of the transactions must be analyzed to determine if the transaction qualifies.
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