Accountability of individual lots in reference to taxes & capital gains

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snoman701

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Oct 8, 2016
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There is some advice that must come from a tax professional, there is others that best comes from those that have been in the business. My tax accountant doesn't know enough about precious metal refining, and it would be odd to have one that did.

My understanding of tax law is that capital gains, whether short or long term, are realized on any jewelry or investment grade precious metal. The tax is only applied to the change in value from time acquired in relation to cost basis.

What cost basis is used though, cost basis at acquisition, or basis at time of refinement?

Lets say I buy a lot of sweeps for $400. I don't have time to get to it for six months. After six months, I refine it and find that at a gold market of $1350, my $400 purchase has a refined value of $600. I log it in to inventory, and sell for $622 at a $1400 gold market.

Now, if my understanding is correct, I have a regular "profit" of $200, and income subject to capital gains taxes of $22, for change in value from the time it became the equivalent of investment grade material.

OR

At the time of purchase I must record gold market (lets say a market of $1250), and then after refinement, figure cost basis on gold market at acquisition?

OR

Is none of it "investment grade" because it's not stamped bullion or finished jewelry, so capital gains would not apply??

From the antiques side, I know that in an audit, the IRS absolutely wants to see lot by lot accountability, so that say, a gram of gold, can be traced from acquisition to disposition, I'm just not sure where capital gains comes in on the refinement side.
 
I don`t know how it is across the pond, but over here we have corporate income tax system, so basically you must pay ~15% from any profit your company made, that is, of course, without even mentioning the VAT. There is reduced income tax rate for individuals (not companies) regarding investments, but for a business you must pay your full 15% income tax rate.

I understand that due to the tax legislation differences my comment may be of little use for you so let me at least try to offer you a little tip to maybe steer you in the right direction - I would bet that for any reduced investment tax rates to apply (if they are available in US) to your initial purchase, it should be logged in to accounting as investment from the very start. I highly doubt that legaly you can retroactively change which deals go through as transactions taxable with income tax and which are treated with investment tax rates.

-Artūrs
 
What is your business? Investing in gold, or refining? If it's refining, then go with a cost basis inventory and file Schedule Cfor your refining business.

What you pay for a lot is the cost (including shipping charges!!). All of the lots bought in a year add to the cost. At the end of the tax year, what is left? Whatever is left is inventory on hand, and accountable on Schedule C at cost only. Only when you sell does any income arise. As a value adder/refiner, I don't see capital gains entering the picture. If you bought bars low and sold high, and added nothing to them, then yes, it's investments. But if you provide a value added service such as refining, that is your business, and all costs (COGS, or costs of goods sold) are deductible on the Schedule SE as expenses. By the way, you do pay tax on inventory, which is why companies dump inventory at the end of their fiscal year... Last years end-of-year inventory becomes the next years beginning inventory.

Kept a lot or two for yourself? Treat it as inventory, again at cost basis. When you sell, add it to Schedule C income. You refined it - the value added is the only income, and not an investment.

As it relates to your business, all advertising, chemicals, glassware, equipment (some may even bring depreciation deductions....), rents, office expenses, maintenance, mailing supplies, postage, utilities....- all are expenses on Schedule C. Vehicles and home use are special areas I'd rather not go into, but if you account for miles driven and all costs, any business use of the vehicle is deductible as well. If you use square feet of your home or property, it too is deductible, but there are limits.

You do not have to have an employer ID number (EIN) unless you are a corporation, or have employees. Your SSN is your EIN on schedule C if you are self employed and follow cash-basis accounting (no accounts payable/receivable). Filing Schedule C triggers the Self-Employment tax/Schedule SE, so you will see that - it essentially is the "other half" of Social Security that an employer would pay for an employee. As self-employed, you pay on yourself.

I use TurboTax Self-Employed version to do my taxes - most paid preparers charge a base price for the 1040 and a separate amount for each additional form (Schedules A/B/C, SE, depreciation, business use of a home, etc) - TurboTax charges the one price only.

Accounting? I use GoDaddy Accounting - formerly Outright - and it's online, has a phone app, and pulls data from both the bank and PayPal. Automatic accounting - I go in weekly to assign categories to the ambiguous stuff or add receipts (take a photo with your phone in the app.....) - all for $119/yr.

Cheers,

Brian - 1040/Schedule C filer since 2008....and former IRS VITA volunteer.

Note: The above was edited to correct inaccurate references - many thanks to IdahoMole for pointing out my mistakes.
 
As a postscript, think of a classic or antique car restorer. They get a barn find Maserati for $2K, fix it up, and sell it at auction for $120K. Their income is from the value added, not the investment value of the car. They get to deduct expenses, say $38K in parts and labor to restore, so only $80K ($120K - $2K -$38K) is income.

It doesn't matter what a similar Maserati sold for recently, nor does it matter that others buy Maseratis as investments - the only profit for the restorer is Income minusExpenses.
 
Findm-Keepm said:
Brian - 1040/Schedule SE filer since 2008....and former IRS VITA volunteer.

Thanks Brian...your post made sense, and follows logic with an IRS document on placer mining, which again mentioned nothing about gains taxes, but my fear was that all too often taxes seem like they make sense, only to learn that you cannot apply simple logic to the tax code. Gains vs regular income is somewhere where I've never ventured before.
 
Findm-keepm's outline of the tax situation is accurate but Schedule C is the one you want not SE. You will use SE to pay the other half of withholdings an employer would take out of your paycheck (yes you get to pay both halves!) but you need to fill out Schedule C first. That is where you calculate income and expenses etc.
It's a nightmare. I have been self employed for 23 years and doing my own taxes most of that time. I am about ready to hire it out but, then again, that is what i said last year. :roll:
 
I've been a schedule C filer practically my whole life, though I've held other jobs...I've just never had enough precious metals activity to worry.

I get them done at the accounting firm I worked at in college, but I like to have everything prepared when I walk in.
 
IdahoMole said:
Findm-keepm's outline of the tax situation is accurate but Schedule C is the one you want not SE. You will use SE to pay the other half of withholdings an employer would take out of your paycheck (yes you get to pay both halves!) but you need to fill out Schedule C first. That is where you calculate income and expenses etc.
It's a nightmare. I have been self employed for 23 years and doing my own taxes most of that time. I am about ready to hire it out but, then again, that is what i said last year. :roll:

Yep, you're right - I had SE on the brain after being up for 19 hours. :oops:

Most accounting software will generate your Schedule C information in a report - transfer the numbers, and all is well. The service I use generates one, but it lumps some expenses together, so there is some manipulation needed.

THANK YOU IdahoMole - and for others - just insert "Schedule C" where you see Schedule SE above in my first post - I'd change it myself, but it may violate forum rules.
 
Findm-Keepm said:
I'd change it myself, but it may violate forum rules.

Fixing posts is not a problem, just add a note that you edited it to fix a problem.

You never know if someone will read your second post describing the mistake, so it is better to fix it on the original.
 
I don't think I've ever written a post that I didn't edit, except for happy birthday ones. Some long ones I might edit 50 times, literally.
 
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