Whats to prevent...(RE: New reporting 1099)

gecko109

I have been thinking quite a bit about the new 1099 law. I have a scenario im going to lay out and its YOUR job to tell me what is to prevent this from occurring.


Hypothetical:

Johnny Smith is a 53 year old professional who has been stacking gold bullion since the mid 80's until about 2003. Through diligent aquisitions, he has accumulated 125 ounces of gold in that time frame at a cost basis of around $400/oz. Under current reporting law (until 2012), a coin shop has no obligation to report purchases to the IRS of under 25oz of gold bullion. Rather it is up to Mr. Smith to report such a sale himself at tax time. What is to prevent Mr. Smith from visiting 5 dealers in the next few months and unloading all 125oz of gold so that the sales are not automatically reportable.....and then going out and buying those 125oz back at a "new" cost basis of $1200/oz? The only thing Mr. Smith has to lose from a financial perspective is the commissions on such a swap of perhaps 6% of his stack. By running the numbers, at a 6% cost of commissions, Mr. Smith loses about $9,000 on his holdings. However, with a cost basis of $400/oz, and a profit of $800/oz at 28% tax rate, Mr. Smith just avoided a $28,000 IRS payment, thus saving himself a very nice $19,000.


Now, I know the knee jerk reaction to this will be...."but if he gets audited". Aside from any the fear of a tax evasion rap being brought upon him, is there any reason to prevent Mr. Smith from doing the above as a matter of "civil disobedience"?

Smittys

<< <i>I have been thinking quite a bit about the new 1099 law. I have a scenario im going to lay out and its YOUR job to tell me what is to prevent this from occurring.


Hypothetical:

Johnny Smith is a 53 year old professional who has been stacking gold bullion since the mid 80's until about 2003. Through diligent aquisitions, he has accumulated 125 ounces of gold in that time frame at a cost basis of around $400/oz. Under current reporting law (until 2012), a coin shop has no obligation to report purchases to the IRS of under 25oz of gold bullion. Rather it is up to Mr. Smith to report such a sale himself at tax time. What is to prevent Mr. Smith from visiting 5 dealers in the next few months and unloading all 125oz of gold so that the sales are not automatically reportable.....and then going out and buying those 125oz back at a "new" cost basis of $1200/oz? The only thing Mr. Smith has to lose from a financial perspective is the commissions on such a swap of perhaps 6% of his stack. By running the numbers, at a 6% cost of commissions, Mr. Smith loses about $9,000 on his holdings. However, with a cost basis of $400/oz, and a profit of $800/oz at 28% tax rate, Mr. Smith just avoided a $28,000 IRS payment, thus saving himself a very nice $19,000.


Now, I know the knee jerk reaction to this will be...."but if he gets audited". Aside from any the fear of a tax evasion rap being brought upon him, is there any reason to prevent Mr. Smith from doing the above as a matter of "civil disobedience"? >>




He might have to explain were he got 125K to purchase the gold

AboutAg

<< <i>What is to prevent Mr. Smith from visiting 5 dealers in the next few months and unloading all 125oz of gold so that the sales are not automatically reportable.....and then going out and buying those 125oz back at a "new" cost basis of $1200/oz? >>



Nothing is preventing him from doing so. He would pay tax on the $100,000 gain ($1,200/oz cost minus his $400/oz basis, times 125). Depending on the type of gold, he probably would not need to visit multiple dealers, making it even easier.



<< <i>However, with a cost basis of $400/oz, and a profit of $800/oz at 28% tax rate, Mr. Smith just avoided a $28,000 IRS payment, thus saving himself a very nice $19,000. >>



On if he is willing to commit tax fraud. That was left out of the original question.



<< <i>Now, I know the knee jerk reaction to this will be...."but if he gets audited". Aside from any the fear of a tax evasion rap being brought upon him, is there any reason to prevent Mr. Smith from doing the above as a matter of "civil disobedience"? >>



There is no legal reason not to do what was originally mentioned (the gold swap to get a higher tax basis). As for the tax fraud, yes, the fear of audit would likely be the main concern (which could result in as much as 5 year jailtime and a $250,000 penalty, if I read the laws correctly).

CaptHenway

<< <i>

<< <i>I have been thinking quite a bit about the new 1099 law. I have a scenario im going to lay out and its YOUR job to tell me what is to prevent this from occurring.


Hypothetical:

Johnny Smith is a 53 year old professional who has been stacking gold bullion since the mid 80's until about 2003. Through diligent aquisitions, he has accumulated 125 ounces of gold in that time frame at a cost basis of around $400/oz. Under current reporting law (until 2012), a coin shop has no obligation to report purchases to the IRS of under 25oz of gold bullion. Rather it is up to Mr. Smith to report such a sale himself at tax time. What is to prevent Mr. Smith from visiting 5 dealers in the next few months and unloading all 125oz of gold so that the sales are not automatically reportable.....and then going out and buying those 125oz back at a "new" cost basis of $1200/oz? The only thing Mr. Smith has to lose from a financial perspective is the commissions on such a swap of perhaps 6% of his stack. By running the numbers, at a 6% cost of commissions, Mr. Smith loses about $9,000 on his holdings. However, with a cost basis of $400/oz, and a profit of $800/oz at 28% tax rate, Mr. Smith just avoided a $28,000 IRS payment, thus saving himself a very nice $19,000.


Now, I know the knee jerk reaction to this will be...."but if he gets audited". Aside from any the fear of a tax evasion rap being brought upon him, is there any reason to prevent Mr. Smith from doing the above as a matter of "civil disobedience"? >>




He might have to explain were he got 125K to purchase the gold >>



Explain to whom? Purchases are not reportable (at this time).

mhammerman

OK, just for drill. The gold was bought with money that had already been taxed as income. Then the money was taxed (State, local sales taxes) again when the purchase was made...this is the money that had already been taxed before he made his purchase. Then when he sells it, the gold is taxed again on a 1099. Yet, somehow, he managed to come out with a profit after being taxed twice on the same money already?

Seems like it would be much more equitable if the preceeding taxes already paid on the gold were taken into account at some point in the process. Say, any profit minus the 28% or so tax on income already paid as a credit, then the 8% or so local taxes paid at purchase also credited as already paid, then the actual tax would maybe be something folk could maybe not feel so bad about paying. How can you possibly come out with a profit when your gold has already been taxed at more than 35% before you even sell it?

I predict a shortage of 1/10 age's.

Got Cash?

jmski52

To answer your question, the witholding amount would not necessarily be 100% tax. Your tax ultimately depends on your tax bracket and your total income, including the profit from any gold sales. The witholding amount would be applied to your tax bill, and you might not have to take as much "out of pocket" at the end of the year. The whole idea still stinks anyway though.

Selling the gold prematurely would generate more in transaction costs and do nothing to reduce your taxes, and not reporting the transaction doesn't relieve you of the tax liability. I see no advantage in selling before you need to sell.

In this screwed up world, you should keep track of any assets that you can sell which might be in a loss position, especially if your are thinking of getting rid of them anyway. The losses on other assets can directly offset gains from a gold sale. This puts gold back into the position of "a store of value" - it is there when you need it and it is real.

7over8

my guess is that there would have to be a way to determine a cost basis when a receipt was not available.

maybe a price/oz on the exchange immediately before the reporting takes effect.

no one is expected to pay tax on the whole sale amount - only on the profit (in most usual cases)

Steve27

<< <i>I have been thinking quite a bit about the new 1099 law. I have a scenario im going to lay out and its YOUR job to tell me what is to prevent this from occurring.


Hypothetical:

Johnny Smith is a 53 year old professional who has been stacking gold bullion since the mid 80's until about 2003. Through diligent aquisitions, he has accumulated 125 ounces of gold in that time frame at a cost basis of around $400/oz. Under current reporting law (until 2012), a coin shop has no obligation to report purchases to the IRS of under 25oz of gold bullion. Rather it is up to Mr. Smith to report such a sale himself at tax time. What is to prevent Mr. Smith from visiting 5 dealers in the next few months and unloading all 125oz of gold so that the sales are not automatically reportable.....and then going out and buying those 125oz back at a "new" cost basis of $1200/oz? The only thing Mr. Smith has to lose from a financial perspective is the commissions on such a swap of perhaps 6% of his stack. By running the numbers, at a 6% cost of commissions, Mr. Smith loses about $9,000 on his holdings. However, with a cost basis of $400/oz, and a profit of $800/oz at 28% tax rate, Mr. Smith just avoided a $28,000 IRS payment, thus saving himself a very nice $19,000.


Now, I know the knee jerk reaction to this will be...."but if he gets audited". Aside from any the fear of a tax evasion rap being brought upon him, is there any reason to prevent Mr. Smith from doing the above as a matter of "civil disobedience"? >>




Tax evasion is not a form "civil disobedience," and if they look into the purchase of 125 ounces of gold (roughly $1.5), Mr. Smith may end up in jail.

gsa1fan

How would some go to jail buying gold? They sell red monster box's every year. They make to it sell.

7over8

Mr. Smith probably purchased the gold over his lifetime with his own earnings that were taxed already.

Justacommeman

<Tax evasion is not a form "civil disobedience," and if they look into the purchase of 125 ounces of gold (roughly $1.5), Mr. Smith may end up in jail.>

You or Mr Smith are paying way to much for your gold. MJ

CaptHenway

<< <i>

<< <i>I have been thinking quite a bit about the new 1099 law. I have a scenario im going to lay out and its YOUR job to tell me what is to prevent this from occurring.


Hypothetical:

Johnny Smith is a 53 year old professional who has been stacking gold bullion since the mid 80's until about 2003. Through diligent aquisitions, he has accumulated 125 ounces of gold in that time frame at a cost basis of around $400/oz. Under current reporting law (until 2012), a coin shop has no obligation to report purchases to the IRS of under 25oz of gold bullion. Rather it is up to Mr. Smith to report such a sale himself at tax time. What is to prevent Mr. Smith from visiting 5 dealers in the next few months and unloading all 125oz of gold so that the sales are not automatically reportable.....and then going out and buying those 125oz back at a "new" cost basis of $1200/oz? The only thing Mr. Smith has to lose from a financial perspective is the commissions on such a swap of perhaps 6% of his stack. By running the numbers, at a 6% cost of commissions, Mr. Smith loses about $9,000 on his holdings. However, with a cost basis of $400/oz, and a profit of $800/oz at 28% tax rate, Mr. Smith just avoided a $28,000 IRS payment, thus saving himself a very nice $19,000.


Now, I know the knee jerk reaction to this will be...."but if he gets audited". Aside from any the fear of a tax evasion rap being brought upon him, is there any reason to prevent Mr. Smith from doing the above as a matter of "civil disobedience"? >>




Tax evasion is not a form "civil disobedience," and if they look into the purchase of 125 ounces of gold (roughly $1.5), Mr. Smith may end up in jail. >>



Check your math......

gecko109

"Tax evasion is not a form "civil disobedience," and if they look into the purchase of 125 ounces of gold (roughly $1.5), Mr. Smith may end up in jail. "



Any type of wiiling participation in breaking the law can be categorized as "civil disobedience" if the person breaking the law believes that law is unjust and unfair. That doesnt mean he will avoid jail time, but you are incorrect in stating that tax evasion is not a form of this. It can EASILY be argued that a person got his paycheck....which was already taxed by the government. Then went to use some of that ALREADY TAXED money to buy some gold coins....in which he may have paid MORE TAX to aquire. For that individual to then sell those coins at a later date, and owe yet even MORE TAX on those "profits" seems absurd and is a classic case for civil disobedience if I ever saw one.

Compound this with the fact that his "paper profit" may not be a profit at all. Had this gentleman bought his gold in 1980 at $800/oz.....and sells today at $1200/oz, do you consider that to be a "profit"? The IRS should take into account inflation when determining taxes and cost basis and "profits". Its bad enough that the government forces us to conduct our transactions using a medium of exchange that decreases in value each year. But to not consider that aspect in regards to "profits" made over long periods of time is just unacceptable...and im sure im not the only one who feels this way.

AboutAg

<< <i>How would some go to jail buying gold? They sell red monster box's every year. They make to it sell. >>



In this scenario, the person bought the gold at $400/ounce, sells it at $1,200/ounce, and tells the government "Nothing to see here, I didn't buy anything, I didn't sell anything, I didn't profit."

That is tax fraud, and tax fraud can be punishable by jailtime (and up to ~$250K fine).



<< <i>Mr. Smith probably purchased the gold over his lifetime with his own earnings that were taxed already. >>



He was taxed on the $400/ounce cost basis, which doesn't get taxed when he sells. He only owes tax on the $800/ounce profit (which he has never paid tax on).

derryb

<< <i>He might have to explain were he got 125K to purchase the gold >>


He got the money from under his mattress. He's 53 years old. The tax returns he has filed over the years will probably show close to a million in income. Who said he couldn't shove some of his money under the mattress for the last 20 years. Of course he would have to take cash for his sales and then go deposit it in the bank so he could wire the money for the new purchase. Bank would have to fill out forms for his large deposit. When and if any questions were asked, he took it from his life savings under his mattress. "Don't believe me, there's still $4,800 still under the mattress. Come see for yourself."

mhammerman

"...which he has never paid tax on"

Ah, but he did pay income tax on the money he used to buy the gold and he paid state/local sales tax again when he purchased the gold. He's already paid taxes twice on the same gold and he gets to pay taxes again when he sells it. How many times can you tax the same dollar before it ceases to be a dollar? Actually they should change the name of the dollar from FRN to TM...Tax Magnet.

derryb

The success of the US tax program is based on the velocity of money. The more times it changes hands the more taxes it generates. In a thriving economy a single dollar can create much more in taxes than its face value.

fishcooker

"Don't believe me, there's still $4,800 still under the mattress. Come see for yourself."

Sounds like a good way to lose another $4800.