2011: the Last Year to Sell Precious Metals

2011: the Last Year to Sell Precious Metals
By Rnald G. Pittenger

As TOJ reported back on 22 Jul 2010, thanks to Section 9006 of the Patient Protection and Affordable Care Act (Obamacare) this year, 2011, will be the last year in which you rich devils can sell a gold coin, bar, item of jewelry, or gold in any other form to a metals dealer without having to await an IRS form 1099 to append to your tax return.  While a 1099 doesn't automatically mean an increase in your taxes due, it does mean you must explain why the transaction isn't taxable income.  It was a gift from your grandfather back in 1975, you say?  That might well be considered income.  You bought it in 1987 when gold was around $290 an ounce?  That means you only have to pay taxes on the increase in value; may we please see your receipt and other records from 1987?  You don’t have them because you were 13?  Sorry, chum, we have to assume it is entirely taxable, in that case.  You say this is the coin collection you spent 40 years growing and enjoying?  How fortunate for you—but all that capital gain is still taxable income, and don’t forget to save your records for the audit.

This has been a long term battle between various of the Hydra-like heads of the federal government and the coin and bullion dealers and collectors that started back in the 1979 – 1980 run up of gold and silver prices.  The FTC tried several times to “regulate” the bullion markets with the strong backing of the IRS.  The FTC wanted to “protect consumers’ interests,” and the IRS wanted to capture some of the vast amount of “value increase” (due to Carter’s inflation) as taxable income.  Fortunately, they couldn’t muster the political support before the prices started going back down and then stabilized at levels higher than in the 70s, but nowhere near their peaks.

In part, the change in value was due to Gresham’s Law of Money: “ Bad (devalued) coinage or currency drives out good money.”  When silver was removed from US coinage in the 1960s, the older silver coins disappeared from circulation very quickly.  Although the useful life of any coin is expected to be four to six decades (as opposed to mere weeks for paper currency), virtually all silver coins vanished within five years, replaced with the peanut-butter-sandwich coins we use today (look at one from the edge).  Other than an occasional Wheat-back cent, it’s difficult to find US coins other than nickels in circulation that are dated before 1965.  Look at the current value of the Zimbabwe dollar:  it is worth more as toilet paper than as a spendable medium of currency.  Yet, life goes on and purchases and sales are still made—just not with Zimbabwe dollars.  Most transactions are probably done in barter, but it’s hard to make change for a cow.  Other nation’s currencies are used for the complicated things like getting a haircut.

Gold topped out at about $800 per ounce in the Spring of 1980 as silver briefly hit $32 an ounce.  Over the next few years, they both zigged and zagged until they stabilizd at about $300 and $6 respectively.
 
In times of uncertainty, times of high inflation, or times of war, precious metals can offer a compact, easily transportable way to store wealth.  That drove prices up. 

On the other hand, when times are stable, peaceful, and have low inflation, precious metals suddenly become one of the worst things you can possibly own.  The opportunity cost of lost investment value is simply too high.  Precious metals pay no interest, have little day-to-day utility, and are always at risk of theft or loss.  Just as their advance in price was steep, so was their decline.

Through the 1980s and well into the 1990s, both metals traded in a fairly narrow range.  No one got suddenly rich or broke because of the metals, and the FTC and IRS both had more important fish to fry.  The issue fell off the radar screens of all but the wonkiest of wonks who had dedicated themselves to making war on the “rich.”  Indeed, many of them found themselves climbing into the upper-middle class by simple combination of inflation and long service.  But, old habits are hard to break, especially for old class-warriors driven by jealousy.

Since the late 1990s, as more and more people became concerned about national and international security considerations and the potential for inflation, they turned to the perceived safety of metals.  As of December 31st’s close, gold was at about $1420 and silver was at nearly $31.  The IRS assumes most of the metal being sold is owned at 1990 prices, and thus represents a very large taxable increase in value (a capital gain).
As required by law, when the cost of the Obamacare bill was calculated by the GAO, they were required to calculate it using all the provisions in the bill.  Like the Doc Fix everyone knew was going to be made, it couldn’t be adjusted for provisions that might be repealed later.  Like the 1099 provision requiring every small business to record and report all expenditures of $600 or more to or from any one source during the year.  So, part of the excuse that will be used to defend the 1099 requirement is that repeal “will add to the deficit.”

If you didn’t save the receipt(s) when you bought that ring or brooch, ingot or coin, or if you inherited it from your sainted Granny, you might want to consider writing a brief letter to your Congressmen and Senators.  Remind them that they aren’t playing with the government’s money, they’re playing with your money.  And you’re a registered voter.