A 1031 exchange allows the taxpayer to defer the recognized gain or capital gains tax when the metal or coin is replaced with like-kind precious metals or coins within 180 calendar days of the sale. The 1031 tax deferral is available to all federal income taxpayers, whether a United States resident or non-resident alien. What differentiates a 1031 exchange from a sale are the supporting documents created by the Qualified Intermediary, adherence of 1031 exchange rules and the condition that the taxpayer does not receive, pledge, borrow or otherwise obtain the benefits of the Exchange Account before the end of the Exchange period.
Precious Metals and Numismatic Coins
Precious metals are eligible for 1031 exchanges; however, the exchange is subject to many qualifying Internal Revenue Service Revenue Rulings including:
- Revenue Ruling 82-166, 1982-2 C.B. 190 – gold and silver are not considered like-kind given they are different metals used in different capacities.
- California Federal Life Insurance Co. v. Commissioner of Internal Revenue, 76 T.C. 107, 115, 1981 WL 11365 (1981) – coins must be non-circulating. The Service found a 1031 exchange of Swiss francs for U.S. Double Eagle gold coins not like-kind given the Swiss francs could be used in Switzerland’s open market.
- Private Letter Ruling 8117053 – South African Krugerrand gold coins are like-kind to gold bullion bars; consequently bullion-type coins are considered like-kind to other bullion-type coins.
- Internal Revenue Code Section 1.1031(h)(1) – predominant use of personal property in the United States is not like-kind to predominant use of personal property outside the United States.
When a 1031 Exchange Makes Sense
Before selling precious metals and numismatic coins, consideration should be given to the tax consequences. The capital gains tax is 28 percent. Should there be a sizeable tax and the intent is to replace with like-kind metals or coins, then a 1031 exchange most likely makes sense in addition to the following:
- Changing the location of the precious metals from outside the United States to within the United States or vice versa. Predominant use is considered one year and a day in a two year period.
- Changing the physical form for ease of storage and liquidity.
- Whenever the conversion of an investment to U.S. dollars triggers a taxable event.
1031 exchanges should be evaluated with your CPA who can provide the confirmation whether given the extent of financial transactions, there is a loss carry-forward that would reduce the gain or other considerations. Should you have questions, please click below to request a complimentary consultation with a Certified Exchange Specialist©.
