IRS confirms that gain on ETFs invested in precious metals is collectibles gain
Longacre
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I am copying and pasting below a summary from RIA related to a recently disclosed Chief Counsels Memorandum about precious metals ETFs and the fact that they are taxed as collectibles if sold at a gain. I am also pasting below the Internal Revenue Code section that is referenced in the summary. After reading this and the Code section below, now you know why your very own Longacre is exhausted after a day in the office.
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IRS confirms that gain on ETFs invested in precious metals is collectibles gain
Some investors are convinced that one way to hedge their bets against further shakiness in the financial markets is to invest in a precious metal. The most convenient way to make this sort of investment is through an exchange traded fund (ETF) that holds the metal. A memo issued by IRS's Chief Counsel Office in 2008, but only made available recently on IRS's website (under a new document category called “Legal Advice Issued to Program Managers”), confirms that ETFs that directly invest in precious metals will generate collectibles gain or loss to their investors.
Background. Net capital gain that is adjusted net capital gain is taxed at a maximum rate of 15%. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a zero percent rate for tax years beginning after 2007. ( Code Sec. 1(h)(1)(B) , Code Sec. 1(h)(1)(C) ) Net capital gain attributable to collectibles gain (as well as section 1202 gain) is taxed at a maximum rate of 28%. ( Code Sec. 1(h)(1)(E) , Code Sec. 1(h)(4) ) Collectibles include items such as metals, gems, stamps, and coins.
Physically backed metal ETFs. The Chief Counsel memo is directed only at ETFs that directly invest in metal (“physically based metal ETFs”), such as gold or silver. IRS says that if such an ETF is treated as a trust under Reg. § 301.7701-4(c) , investors in it are treated as having undivided beneficial interests in the assets held by the trust. As a result, investors in a physically backed metal ETF are considered to own undivided beneficial interests in the underlying physical metal. If a trustee of a physically backed metal ETF treated as a trust sells some of the metal held by the trust, the investors are treated as having sold the metal. Additionally, if an investor in a physically backed metal ETF treated as a trust sells or redeems an interest in that ETF, the sale or redemption is treated as a sale of the investor's proportionate share of the metal held by the physically backed metal ETF.
The memo concludes that if an investor sells his interest in the ETF or the trust sells a portion of the metal it holds, the investor is treated as having sold all or a portion of his share of the metal held by the trust and any gain from the sale of the trust interest or sale of the collectible by the trust is treated as collectible gain and subject to the maximum capital gain rate of 28%.
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Here is part of Section 1(h) of the Internal Revenue Code for reference:
(h) Maximum capital gains rate.
(1) In general.
If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—
(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—
(i) taxable income reduced by the net capital gain; or
(ii) the lesser of—
Caution: Code Sec. 1(h)(1)(A)(ii)(I), following, was amended by P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). For sunset provisions, see Sec. 901, P.L. 107-16 reproduced in history notes for this Code Sec.
(I) the amount of taxable income taxed at a rate below 25 percent; or
(II) taxable income reduced by the adjusted net capital gain,
Caution: Code Sec. 1(h)(1)(B), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(B) 5 percent (0 percent in the case of taxable years beginning after 2007) of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—
Caution: Code Sec. 1(h)(1)(B)(i), following, was amended by P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). For sunset provisions, see Sec. 901, P.L. 107-16 reproduced in history notes for this Code Sec.
(i) the amount of taxable income which would (without regard to this paragraph ) be taxed at a rate below 25 percent, over
(ii) the taxable income reduced by the adjusted net capital gain;
Caution: Code Sec. 1(h)(1)(C), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(C) 15 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the amount on which a tax is determined under subparagraph (B) ;
(D) 25 percent of the excess (if any) of—
(i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11) )), over
(ii) the excess (if any) of—
(I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over
(II) taxable income; and
(E) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph .
Caution: Code Sec. 1(h)(2)-(11), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(2) Net capital gain taken into account as investment income.
For purposes of this subsection , the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii) .
(3) Adjusted net capital gain.
For purposes of this subsection , the term “adjusted net capital gain” means the sum of—
(A) net capital gain (determined without regard to paragraph (11) ) reduced (but not below zero) by the sum of—
(i) unrecaptured section 1250 gain, and
(ii) 28-percent rate gain, plus
(B) qualified dividend income (as defined in paragraph (11) ).
(4) 28 percent rate gain.
For purposes of this subsection , the term “28-percent rate gain” means the excess (if any) of—
(A) the sum of—
(i) collectibles gain; and
(ii) section 1202 gain, over
(B) the sum of—
(i) collectibles loss;
(ii) the net short-term capital loss; and
(iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.
(5) Collectibles gain and loss.
For purposes of this subsection —
(A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof ) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.
(B) Partnerships, etc. For purposes of subparagraph (A) , any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.
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Here is Section 408(m), which defines "collectibles":
(m) Investment in collectibles treated as distributions.
(1) In general.
The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402 ) as a distribution from such account in an amount equal to the cost to such account of such collectible.
(2) Collectible defined.
For purposes of this subsection , the term “collectible” means—
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by the Secretary for purposes of this subsection .
(3) Exception for certain coins and bullion.
For purposes of this subsection , the term “collectible” shall not include—
(A) any coin which is—
(i) a gold coin described in paragraph (7) , (8) , (9) , or (10) of section 5112(a) of title 31, United States Code ,
(ii) a silver coin described in section 5112(e) of title 31, United States Code ,
(iii) a platinum coin described in section 5112(k) of title 31, United States Code , or
(iv) a coin issued under the laws of any State, or
(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7 ) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section .
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IRS confirms that gain on ETFs invested in precious metals is collectibles gain
Some investors are convinced that one way to hedge their bets against further shakiness in the financial markets is to invest in a precious metal. The most convenient way to make this sort of investment is through an exchange traded fund (ETF) that holds the metal. A memo issued by IRS's Chief Counsel Office in 2008, but only made available recently on IRS's website (under a new document category called “Legal Advice Issued to Program Managers”), confirms that ETFs that directly invest in precious metals will generate collectibles gain or loss to their investors.
Background. Net capital gain that is adjusted net capital gain is taxed at a maximum rate of 15%. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a zero percent rate for tax years beginning after 2007. ( Code Sec. 1(h)(1)(B) , Code Sec. 1(h)(1)(C) ) Net capital gain attributable to collectibles gain (as well as section 1202 gain) is taxed at a maximum rate of 28%. ( Code Sec. 1(h)(1)(E) , Code Sec. 1(h)(4) ) Collectibles include items such as metals, gems, stamps, and coins.
Physically backed metal ETFs. The Chief Counsel memo is directed only at ETFs that directly invest in metal (“physically based metal ETFs”), such as gold or silver. IRS says that if such an ETF is treated as a trust under Reg. § 301.7701-4(c) , investors in it are treated as having undivided beneficial interests in the assets held by the trust. As a result, investors in a physically backed metal ETF are considered to own undivided beneficial interests in the underlying physical metal. If a trustee of a physically backed metal ETF treated as a trust sells some of the metal held by the trust, the investors are treated as having sold the metal. Additionally, if an investor in a physically backed metal ETF treated as a trust sells or redeems an interest in that ETF, the sale or redemption is treated as a sale of the investor's proportionate share of the metal held by the physically backed metal ETF.
The memo concludes that if an investor sells his interest in the ETF or the trust sells a portion of the metal it holds, the investor is treated as having sold all or a portion of his share of the metal held by the trust and any gain from the sale of the trust interest or sale of the collectible by the trust is treated as collectible gain and subject to the maximum capital gain rate of 28%.
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Here is part of Section 1(h) of the Internal Revenue Code for reference:
(h) Maximum capital gains rate.
(1) In general.
If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—
(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—
(i) taxable income reduced by the net capital gain; or
(ii) the lesser of—
Caution: Code Sec. 1(h)(1)(A)(ii)(I), following, was amended by P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). For sunset provisions, see Sec. 901, P.L. 107-16 reproduced in history notes for this Code Sec.
(I) the amount of taxable income taxed at a rate below 25 percent; or
(II) taxable income reduced by the adjusted net capital gain,
Caution: Code Sec. 1(h)(1)(B), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(B) 5 percent (0 percent in the case of taxable years beginning after 2007) of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—
Caution: Code Sec. 1(h)(1)(B)(i), following, was amended by P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). For sunset provisions, see Sec. 901, P.L. 107-16 reproduced in history notes for this Code Sec.
(i) the amount of taxable income which would (without regard to this paragraph ) be taxed at a rate below 25 percent, over
(ii) the taxable income reduced by the adjusted net capital gain;
Caution: Code Sec. 1(h)(1)(C), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(C) 15 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the amount on which a tax is determined under subparagraph (B) ;
(D) 25 percent of the excess (if any) of—
(i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11) )), over
(ii) the excess (if any) of—
(I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over
(II) taxable income; and
(E) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph .
Caution: Code Sec. 1(h)(2)-(11), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(2) Net capital gain taken into account as investment income.
For purposes of this subsection , the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii) .
(3) Adjusted net capital gain.
For purposes of this subsection , the term “adjusted net capital gain” means the sum of—
(A) net capital gain (determined without regard to paragraph (11) ) reduced (but not below zero) by the sum of—
(i) unrecaptured section 1250 gain, and
(ii) 28-percent rate gain, plus
(B) qualified dividend income (as defined in paragraph (11) ).
(4) 28 percent rate gain.
For purposes of this subsection , the term “28-percent rate gain” means the excess (if any) of—
(A) the sum of—
(i) collectibles gain; and
(ii) section 1202 gain, over
(B) the sum of—
(i) collectibles loss;
(ii) the net short-term capital loss; and
(iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.
(5) Collectibles gain and loss.
For purposes of this subsection —
(A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof ) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.
(B) Partnerships, etc. For purposes of subparagraph (A) , any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.
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Here is Section 408(m), which defines "collectibles":
(m) Investment in collectibles treated as distributions.
(1) In general.
The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402 ) as a distribution from such account in an amount equal to the cost to such account of such collectible.
(2) Collectible defined.
For purposes of this subsection , the term “collectible” means—
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by the Secretary for purposes of this subsection .
(3) Exception for certain coins and bullion.
For purposes of this subsection , the term “collectible” shall not include—
(A) any coin which is—
(i) a gold coin described in paragraph (7) , (8) , (9) , or (10) of section 5112(a) of title 31, United States Code ,
(ii) a silver coin described in section 5112(e) of title 31, United States Code ,
(iii) a platinum coin described in section 5112(k) of title 31, United States Code , or
(iv) a coin issued under the laws of any State, or
(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7 ) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section .
Always took candy from strangers
Didn't wanna get me no trade
Never want to be like papa
Working for the boss every night and day
--"Happy", by the Rolling Stones (1972)
Didn't wanna get me no trade
Never want to be like papa
Working for the boss every night and day
--"Happy", by the Rolling Stones (1972)
0
Comments
Longacre, do you know what these exceptions are:
For purposes of this subsection , the term “collectible” shall not include—
(A) any coin which is—
(i) a gold coin described in paragraph (7) , (8) , (9) , or (10) of section 5112(a) of title 31, United States Code ,
(ii) a silver coin described in section 5112(e) of title 31, United States Code ,
(iii) a platinum coin described in section 5112(k) of title 31, United States Code , or
I knew it would happen.
This thread belongs on the Precious Metals forum.
<< <i>A slabbed American Gold Eagle will sure look weird in a jewelry setting, but I guess that's one way to make a gold coin into something other than the IRS's warped version of a "collectible".
Longacre, do you know what these exceptions are:
For purposes of this subsection , the term “collectible” shall not include—
(A) any coin which is—
(i) a gold coin described in paragraph (7) , (8) , (9) , or (10) of section 5112(a) of title 31, United States Code ,
(ii) a silver coin described in section 5112(e) of title 31, United States Code ,
(iii) a platinum coin described in section 5112(k) of title 31, United States Code , or >>
Longacre stays in Title 26 of the United States Code (the Internal Revenue Code). However, here is a link to Title 31: USC Title 31
Didn't wanna get me no trade
Never want to be like papa
Working for the boss every night and day
--"Happy", by the Rolling Stones (1972)
Maybe I'm mentally challenged.
"“Those who sacrifice liberty for security/safety deserve neither.“(Benjamin Franklin)
"I only golf on days that end in 'Y'" (DE59)
<< <i>Here is part of Section 1(h) of the Internal Revenue Code for reference:
(h) Maximum capital gains rate.
(1) In general.
If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—
(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—
(i) taxable income reduced by the net capital gain; or
(ii) the lesser of—
Caution: Code Sec. 1(h)(1)(A)(ii)(I), following, was amended by P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). For sunset provisions, see Sec. 901, P.L. 107-16 reproduced in history notes for this Code Sec.
(I) the amount of taxable income taxed at a rate below 25 percent; or
(II) taxable income reduced by the adjusted net capital gain,
Caution: Code Sec. 1(h)(1)(B), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(B) 5 percent (0 percent in the case of taxable years beginning after 2007) of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—
Caution: Code Sec. 1(h)(1)(B)(i), following, was amended by P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). For sunset provisions, see Sec. 901, P.L. 107-16 reproduced in history notes for this Code Sec.
(i) the amount of taxable income which would (without regard to this paragraph ) be taxed at a rate below 25 percent, over
(ii) the taxable income reduced by the adjusted net capital gain;
Caution: Code Sec. 1(h)(1)(C), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(C) 15 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the amount on which a tax is determined under subparagraph (B) ;
(D) 25 percent of the excess (if any) of—
(i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11) )), over
(ii) the excess (if any) of—
(I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over
(II) taxable income; and
(E) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph .
Caution: Code Sec. 1(h)(2)-(11), following, was amended by P.L. 108-27. For sunset provisions, see Sec. 303, P.L. 108-27 reproduced in history notes for this Code Sec.
(2) Net capital gain taken into account as investment income.
For purposes of this subsection , the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii) .
(3) Adjusted net capital gain.
For purposes of this subsection , the term “adjusted net capital gain” means the sum of—
(A) net capital gain (determined without regard to paragraph (11) ) reduced (but not below zero) by the sum of—
(i) unrecaptured section 1250 gain, and
(ii) 28-percent rate gain, plus
(B) qualified dividend income (as defined in paragraph (11) ).
(4) 28 percent rate gain.
For purposes of this subsection , the term “28-percent rate gain” means the excess (if any) of—
(A) the sum of—
(i) collectibles gain; and
(ii) section 1202 gain, over
(B) the sum of—
(i) collectibles loss;
(ii) the net short-term capital loss; and
(iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.
(5) Collectibles gain and loss.
For purposes of this subsection —
(A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof ) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.
(B) Partnerships, etc. For purposes of subparagraph (A) , any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.
*******************
Here is Section 408(m), which defines "collectibles":
(m) Investment in collectibles treated as distributions.
(1) In general.
The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402 ) as a distribution from such account in an amount equal to the cost to such account of such collectible.
(2) Collectible defined.
For purposes of this subsection , the term “collectible” means—
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by the Secretary for purposes of this subsection .
(3) Exception for certain coins and bullion.
For purposes of this subsection , the term “collectible” shall not include—
(A) any coin which is—
(i) a gold coin described in paragraph (7) , (8) , (9) , or (10) of section 5112(a) of title 31, United States Code ,
(ii) a silver coin described in section 5112(e) of title 31, United States Code ,
(iii) a platinum coin described in section 5112(k) of title 31, United States Code , or
(iv) a coin issued under the laws of any State, or
(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7 ) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section . >>
Well, there goes accounting from my career choices.
"Live long and prosper"
My "How I Started" columns
TD
Capt H., I had a similar experience with my 2nd year economics course in which after the first few classes it became clear to me that I couldn't understand anything the eco. professor was talking about. It was simpler to read the textbook on my own. So I skipped the rest of the semester and then took the final exam. I was scared that the guy might flunk me or ask me where I had been. But he was so clueless I don't think he even knew I missed 90% of the classes. But I did well on the final and got a B+ for the course.
roadrunner
<< <i>I went to college intending to be an accountant, and in my sophmore year took Accounting 101 and 102. I took the Summer off, came back in the Fall of my junior year for Accounting 103 and when I opened the textbook realized that I could not remember a damp thing from Accounting 101 and 102. Got up and went and changed my major.
TD >>
I did the exact same thing in 1970, changed my major to Economics!
The basis of Marketing back then was that there was no such thing as a rational consumer. The average consumer would buy the inferior product if it was in a pretty blue bottle.
I got my degree in Marketing.
TD
All of this for a few bucks.