Investing
in Gold: Frequently Asked Questions By Charles Goyette
| September 15, 2010
Question: What are the current reporting requirements
for gold buyers? Can I deal in cash?
ANSWER: In general, your broker or dealer
will report to the IRS any payment of cash, or series of
payments that are related transactions, for amounts of $10,000
or more. This reporting requirement extends to the use of
cash equivalents, cashier’s checks, money orders,
and other monetary instruments, even if they are less than
$10,000, as part of cash transactions. Increasingly precious
metals dealers are refusing to take any cash in transactions.
Bear in mind, these reporting requirements are directed
at the use of cash, and are not specific to the coin or
bullion markets. In other words, the simple act of purchasing
gold or silver is not a reportable event. Neither you nor
your dealer is required to report purchases made with personal
checks, bank wires, and cashier’s checks unless they
are part of cash transactions described above.
When you sell precious metals to your broker, he is required
to report some items to the IRS. The industry Council for
Tangible Assets is a trade association of precious metals
dealers. It advises its members to file an IRS Form 1099b
when clients sell them certain gold, silver, and other bullion
products, including one-ounce Krugerrand, Maple Leaf, and
Mexican Onza gold coins, U.S. silver bags, and some bars.
In general remember that you must report capital gains in
precious metals as you would any other investment. Be sure
to keep records of your purchases and sales for reporting
purposes.
The IRS classifies precious metals investments as "collectibles,"
whether bullion, coins, or even in ETFs. That’s right,
the IRS lumps them right in there with "any work of
art, any rug or antique . . ." The tax rate for collectibles
is 28 percent versus 15 percent for most long-term capital
gains. (The government really doesn’t want you to
own this stuff!) Contact your tax adviser for specific information.
Question: Can I leave my gold and silver in storage
with the dealer?
ANSWER: No. Don’t let your dealer
hold on to your gold and silver. It’s not that your
dealer may not be trustworthy, but too many people have
lost too much doing that, either through mismanaged brokerages
or through fraud. It’s an unnecessary risk, easily
avoided.
Question: Then what do I do with it? Where do I
put it?
ANSWER: Many people have a place to keep
their gold in their homes. Others prefer to keep it locked
up in a safety deposit box.
Question: But in the last chapter you raised the
issue of confiscation and the possibility that safety deposit
boxes may have to be opened in the presence of an inspector.
ANSWER: Anything can happen and it is
useless to consider the possibilities when it is too late.
For the time being safety deposit boxes may be safe. You
are likely to be better off buying gold and keeping it in
a safety deposit box if you must, than not having any at
all. But do keep in mind that we have already experienced
bank runs in the current crisis. Banks can close in the
event of amonetary breakdown or a bank holiday.
Question: What about the risk of the exchange-traded
funds like GLD being nationalized? That’s a lot of
gold up for grabs.
ANSWER: The growing mountains of gold
in exchange-traded funds may indeed be an attractive target
for government plunder, even though the $35 billion in market
capitalization of the two largest gold ETFs is not enough
to make a dent in the government’s financial predicament.
But the real motivation for controlling people’s
economic behavior is often actually for purposes of social
engineering, and not financial at all. Issuers of fiat currencies
are always hostile to gold and must suppress it at the first
hint of a challenge. If a wholesale abandonment of paper
dollars begins to build, it is to be expected that private
gold stockpiles would become a target.
There is usually plenty of warning before command economies
begin wholesale confiscation. In the 1930s gold coins began
disappearing from circulation months before they were confiscated.
Question: How can you tell when something like
that will happen? What are the warning signs?
ANSWER: The governing authorities will
do anything at all to keep themselves in power and to keep
their game going. Watch the usual sources of revenue. Is
it becoming harder for the government to borrow? Are new
taxes failing to produce? If you are not under any illusions
about what they will do, you’ll recognize the signs
when they about to grab your gold.
Such actions are usually implemented under cover of a calamity:
war, a devastating terror attack, economic collapse, civil
disruption. Depending on the severity of the crisis, rather
than confiscation, the authorities may find it more expedient
to use onerous taxation to profit from private gold stockpiles.
The tax system is already in place and gold is already the
target of punishing tax treatment. But this discussion provides
a good opportunity to reiterate that your core position
in both gold and silver should consist of real metals in
your possession.
Question: How do I know my gold coins are real?
What about counterfeits?
ANSWER: It’s not really a problem
with the bullion coins recommended here. Anybody who handles
gold coins would instantly recognize a counterfeit gold
coin by its weight, feel, and even its sound. Few things
weigh or feel like gold. Lead and silver are so much lighter
that counterfeits of either would be instantly noticeable.
Platinum is actually a little heavier than gold, but since
it costs more, there is no advantage to counterfeiting "gold"
coins with platinum. Tungsten is closer in weight but difficult
to mint. To satisfy yourself, deal with reputable and experienced
people and ask to see and hold several types of gold bullion
coins. Although privacy is the cardinal rule of gold investing,
you may want to bring along a family member or trusted friend
who has experience in precious metals investing.
Interestingly, almost all the counterfeiting of gold coins
is confined to numismatic coins. Counterfeiters will use
real gold or sometimes a lesser-carat gold to counterfeit
coins that sell for premiums well above the gold price.
If you are not buying numismatic coins, this will not be
a problem for you.