Whether an investor is converting from physical possession to allocated storage or overseas storage, from coins to bars or into exchangeable traded funds, or from gold to silver, buying and selling precious metals is ideally suited for like-kind exchanges and wealth preservation since regulations were issued in 1991. Investors who own gold and silver can take advantage of the price differentials and rate of appreciation in gold and silver. This opportunity gives precious metal owners a tremendous advantage over other investment asset classes.

Investors can increase their wealth tax-free using like kind exchanges. Investors who have owned gold for the last six months have enjoyed a 14.77% increase into May 2011. However, if that same gold investor had converted their gold bullion for silver bullion, they would have enjoyed an 85.56% increase in wealth over the period and paid no taxes on conversion. Current taxes on gold and silver held for more than a year are 28%, plus state taxes. Taxes for assets held for 12 months or less are 35%, plus state taxes.

Like kind exchanges must be handled by a qualified and experienced exchange company, such as All States 1031 Exchange Facilitator, acting as a third party, and not by a dealer or by the investor. The funds must be held in a qualified escrow account. All States 1031 Exchange Facilitator manages the exchange quickly and efficiently to minimize any market risk by not being continuously invested, provides all necessary documentation and official tax forms to attach to your tax return, and a tax opinion that protects your exchange from a potential IRS challenge.

Tax Reporting Requirements for the Purchase, Sale and Exchange of Precious Metals

1. What is a taxable sale of precious metals? A taxable sale occurs when the investor relinquishes legal title and possession to his or her precious metal investment, in any form in return for consideration.
2. How do I compute taxable gain or loss? The amount received from the sale or disposition of the precious metal shall be the sum of money received plus the fair market value of other property received.¹
   The taxable gain from the sale of precious metal shall be the excess amount received over the original purchase price of the property sold. Provided that the investor is not a dealer in precious metals, the taxable gains from the sale of precious metals are treated as gains from the sale of capital assets. Provided that the property sold is owned for one year plus one day, the owner is entitled to tax the sale at 28% rate. If the property is owned for one year or less, the owner is taxed at his or her respective marginal tax rate, which can be as high as 35%.
3. Transactions that result in taxable sale. Transactions where physical possession of precious metal is surrendered and transferred to another party in return for a sum or money and/or the receipt of other property. Based on your custodial agreement, the transfer between allocated storage of specific coins or bars and unallocated percentage interest in a storage pool of coins or bars accounts would be a taxable sale. The exchange of physical gold for a fractional undivided interest in a pool of bullion is a taxable sale.
4. 6 steps to Convert a Taxable Sale into a Non Taxable Exchange. The sale and subsequent purchase of precious metals is a taxable sale, even if the transactions are done within 45 days. In order to defer the tax on gain from the sale of precious metals, the transaction must follow the technical requirements of Section 1031 as follows.
   1. The first step in converting a taxable sale into a non-taxable exchange is to include language in the purchase and sale agreement required by the tax regulations identifying the sale as an exchange.
   2. The investor enters into an agreement with All States 1031 Exchange Facilitator to facilitate the exchange for the investor. All States 1031 Exchange Facilitator is also known as a Qualified Intermediary. The agreement must be executed before the purchase or sale.
   3. The buyer and the seller of the property to be sold acknowledge in writing the transaction is an exchange.
   4. The proceeds are deposited into a qualified escrow account as provided in the exchange tax regulations.
   5. Replacement properties must be identified within 45 days of the sale date and received within 180 days.
   6. The buyer and the seller of the property to be purchased acknowledge in writing the transaction is an exchange.

Exchange of Precious Metals

Exchange bullion coins = bullion bars or ingots. Where the price is based on the precious metal content, bullion coins such as gold American Eagles maybe exchanged for gold bars or vice versa of the same metal.

Bullion/Coins = ETF certificate. As long as the Exchange Traded Fund represents a fractional undivided interest in the underlying bullion, these may be exchanged in both directions of the same metal.

Bullion coins to bullion coins. Where the price is based on the precious metal content, bullion coins may be exchanged for bullion coins of the same metal.

Numismatic coins to Numismatic coins. While there are no rulings or cases on this point, we believe the treasury regulations support Numismatic coins to Numismatic coins exchanges under the same rules that apply to artwork and other collectible exchanges.

Exchanges Between Gold and Silver.

While there is a 1982 Revenue Ruling which disapproves of this type of exchange, we believe that the similar nature and character test in 1991 tax regulations support this type of exchange and supercede the 1982 ruling. Gold and silver share similar physical and chemical properties as well as their primary use is the same. A tax opinion can be provided to protect against penalties or interest from an IRS challenge.

Exchanges between platinum and palladium are possible as well since both metals share similar physical and chemical properties as well as the fact that their traditional use is the same. A tax opinion can be provided which will provide protection against penalties or interest from an IRS challenge.

Exchanges between Gold/silver metal group and Platinum/palladium is unclear at this time and not advisable.

Section 1031 of the U.S. Tax Code provides that when a property is sold and the proceeds are used to purchase a property that is like kind, the investor can defer the taxable gain by following the requirements of Section 1031.

The 1991 Tax Regulations Section 1.1031(a)-1(b) states the words 'like kind' have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not be exchanged for property of a different kind or class.

The fact that an asset is improved or unimproved is not material, it relates only to the grade or quality of the property and not to its kind or class.

For exchanges occurring on or after April 11, 1991, Treasury Regulation 1.1031(a)-2(c)(1) provides the general rule that an exchange of nondepreciable personal property (such as precious metals) qualifies for nonrecognition of gain or loss under section 1031 only if the exchanged properties are of a like kind. The notice of proposed rulemaking explained that these types of property were not divided into like classes because of the variety of such personal property and the lack of generally available classification systems.

The Tax Regulations do not provide any examples for an exchange of non depreciable personal property, including exchanges of precious metals.

Why can’t I just exchange my precious metals?

Section 1031 is unique in the U. S. Tax Code. It is not a self help provision. Every exchange must involve an Exchange Company, such as All States 1031 Exchange Facilitator to authenticate the exchange and to carry out the technical requirements of Section 1031. Failure to adhere to the technical requirements results in taxation of gains.

1. The contract for the sale and delivery of the precious metal must assign the rights to receive the proceeds from the sale to an Exchange Company to place into a special bank account known as a qualified escrow account. No assignment, no exchange.
2. The qualified escrow bank account and the escrow holder (Bank) must agree to be governed by the tax provisions in Treasury Regulation 1.1031(k)-1(g)(6). If the language is not in the escrow account or the escrow holder does not agree, then exchange fails. Very few Banks have these type of accounts. It is simple enough for the IRS to ask the Bank if they maintain a QEA bank account. If they don’t, then the exchange failed.
3. The sale and delivery agreement must state that the sale of the precious metal is subject to Section 1031 and the other party must agree to those terms and sign an acknowledgement. No acknowledgement, no exchange.
4. The investor must provide a specific written identification within 45 days of the precious metals he or she intends to acquire to the Exchange Company. No identification, no exchange.
5. The Exchange Company procures and delivers payment for the replacement asset on behalf of the investor to be received within 180 days of the sale.
6. The sale and purchase must be reported on Form 8824 and attached to your income tax return for the year of sale.
7. Identical Parties. For example, if Adam sells his gold to Brad and buys his replacement coins from Carl, an Exchange Company needs to be involved.
8. A Dealer may not act as an Exchange Company. Nor can your friends, relatives, employees, partners, business associates, lawyer, accountant or other agents or brokers.
9. A simultaneous exchange of physical assets over the counter may be treated as an exchange as long as it falls within the category of permissible exchanges (see part 4). Any time delay or delay in receipt of physical possession receipt of cash requires an Exchange Company.

For more information on 1031 exchanges, call All States 1031 Exchange Facilitator at 877-395-1031.