Gifted Physical Gold and Tax Implications: Are there any?

[kjs94gt]

A deceased family member gifted some physical gold to us: bars, coins, etc. We are unable to find any record of the purchase of these other than maybe credit card transactions but those would be difficult/impossible to source. When we sell them, what are our tax implications? These were bought when gold was still quite a bit lower than it is today.

1: Are we going to be subjected to capital gains tax? If so, at what rate and what amount will be taxed? We acquired them for basically no cost so are we going to be taxed on the gains from $0 (since we were gifted these) to the current sell price ($1723/ounce) or how does all of that work?

2: Since these were given to us before this family member died, are they considered a gift/inheritance and there's no inheritance/gift tax?

3: Even if there is no inheritance/gift tax, will these have to be reported as income?

I'm not a tax professional and there's a LOT of information to sort through on here so I appreciate any direction that one of you might provide. We are in Texas by the way.

[KrisD15]

1. Since they were gifts, your basis is the adjusted basis of the donor. 

2. Gift tax is only due or reported by the personal that made the gift, not the person that received it. 

3. You don't report gifts as income, only the capital gain when you sell an item for more than it was worth when you were gifted it. 

[Edited 03/03/2021 | 12:11 PM PST]

[Carl]

Some clarification is probably called for here.

A deceased family member gifted some physical gold to us: bars, coins, etc.

A deceased person can't "gift" anything to anyone. There is a defined difference between a gift, and an inheritance, and that difference matters to the IRS for tax purposes.

If the items were left to you in a will, or if awarded to you in probate after their passing, then what you have is not a gift. It's an inheritance. It does not have to be reported on any tax return and you do not pay any federal taxes on it, if the value is less than $11.5M  (I can't speak for state taxes, but for most states that tax personal income, the same holds true.)

The only value you need, is the fair market value of the item on the date the original owner passed. That will be your cost basis. You will need this cost basis only if you sell or otherwise dispose of the items in the future. The cost basis will never be taxed. But it will be used to determine if you have a taxable gain or loss in the future, in the tax year you sell or otherwise dispose of the items.

[AmeliesUncle]

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@kjs94gt wrote:

A deceased family member gifted some physical gold to us

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Can you clarify that statement?  Did the family member give a Gift to you while he was alive, and now he died?  Or did you inherit it after he died?

[kjs94gt]

The family member gifted this gold to us while he was alive, but has now passed away. All of this occurred in the same tax year.

[ColeenD3]

If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. PUB 551

When you sell it, you will have a capital gains tax. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate. Collectible

If you know about when it was purchased, you may be able to look at historical gold prices.

[Opus 17]

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@kjs94gt wrote:

The family member gifted this gold to us while he was alive, but has now passed away. All of this occurred in the same tax year.

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@KrisD15 is incorrect and @ColeenD3 is correct.

If the items were gifted while the giver was alive, your cost basis is the giver's cost basis.  The giver's cost basis is what they originally paid.  (If the giver themselves received the property as a gift, or inheritance, it become more complicated, and there are a few other rare tweaks, but most of the time, the giver's basis is simply the price they paid.)

Your problem is that, if audited, the IRS does not have to give you credit for any basis you can't prove.  We would probably be safe in assuming that the original price was at least $35 per ounce, since your relative could not have bought the gold before they were born.  If you have some idea of at least what year your relative started buying gold, you might make a reasonable guess based on historical prices.  Coins with mint dates can't have been bought before the date in question.  You might have other clues.  But, if audited, it will all come down to whether the individual auditor will give you credit for a reasonable guess or not.  

Then, as stated above, you will owe capital gains tax on the difference between the selling price and the cost basis (whatever basis you can prove), and the capital gains rate for gold is higher than for other investments.

The one way you could avoid this problem is to "bury" the gold somewhere until you die.  Your heirs would get a cost basis equal to the market value on the day they died, and their resulting capital gains tax would be much less than yours.

If you decide to spend the gold, you will need to come up with a reasonable estimate of the basis, and hope you aren't audited. 

[kjs94gt]

@Opus 17 I understand and appreciate your input. However, I don't want to "hope" I'm not audited. I want to do things right so if I am audited, I can be prepared to answer honestly and as accurately as possible. This is why I'm here asking questions. This is why tax is such a difficult situation because there are multiple different answers from people who believe they are correct. I'm not a tax professional so I just want to find the right answer.

Some gold has been bought over 20 years. Most had been bought in the last few years (2017-2020). I have no way of proving what he bought or when as we also don't have access anymore to old credit card receipts. I wish this was cut and dry but it appears it won't be.

[kjs94gt]

@ColeenD3 Thanks for your answer as well. So, as you stated, "If you know about when it was purchased, you may be able to look at historical gold prices." I can't prove when any of it was bought originally. So how would I make an accurate assessment to appease the IRS and do my best to avoid any headaches? Am I just making a best effort attempt to be mostly correct? Is there any way to be completely correct? The donor officially handed the items over to us a few days before his passing. So, how do I handle this?

[Opus 17]

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@kjs94gt wrote:

@Opus 17 I understand and appreciate your input. However, I don't want to "hope" I'm not audited. I want to do things right so if I am audited, I can be prepared to answer honestly and as accurately as possible. This is why I'm here asking questions. This is why tax is such a difficult situation because there are multiple different answers from people who believe they are correct. I'm not a tax professional so I just want to find the right answer.

Some gold has been bought over 20 years. Most had been bought in the last few years (2017-2020). I have no way of proving what he bought or when as we also don't have access anymore to old credit card receipts. I wish this was cut and dry but it appears it won't be.

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If you sell the gold, the only thing you have is hope.  Unless you decide to report the basis as zero and report the entire proceeds as taxable capital gains.

You can do as much research as you can to establish a reasonable cost basis, but if you can't prove it, then you are at risk in case of audit.  

You will want to make an individual inventory.

A coin minted in 2010 could not have been purchased in 2009 or earlier.  It's cost could only have been the price of gold after 1/1/2010.  You might choose the price on 1/1/10, or the average price for the year, or the lowest price of gold since 1/1/2010,, which is the lowest possible price the gold could have been purchased for.

Then if you have a bar stamped 2017, do the same research.  If you want the least risk of being challenged by the IRS, try to establish the lowest price it could have been purchased for.  

But unless you want to pay tax on the entire sales price, or you are willing to bury the gold until your children inherit it, you are going to have to include some level of hope when you sell it. 

[Opus 17]

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@kjs94gt wrote:

@ColeenD3 Thanks for your answer as well. So, as you stated, "If you know about when it was purchased, you may be able to look at historical gold prices." I can't prove when any of it was bought originally. So how would I make an accurate assessment to appease the IRS and do my best to avoid any headaches? Am I just making a best effort attempt to be mostly correct? Is there any way to be completely correct? The donor officially handed the items over to us a few days before his passing. So, how do I handle this?

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You aren't going to be completely correct unless you have receipts matched to the physical objects.  For example, a coin bought in 2000 will have a lower basis than a coin bought in 2020.  The taxable gain on each coin will be different.  You need a specific inventory of each object with the value you have determined, and notes of how you determined the price. 

A "fair" price might be the average price for the year the item was purchased.  A conservative basis would be the lowest possible price for a specific item.  For example, if you know your relative only started buying bars in 2017, then the lowest basis would be the lowest gold price between then and now.  For dated items, the lowest possible basis would be the lowest gold price since the date.

However, the real lowest possible price is zero, and there is no guarantee the IRS will accept your valuations when you don't have specific receipts.

Make a detailed inventory, determine your best price for each specific coin or bar, and make notes of how you determined that price.

[AmeliesUncle]

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@Opus 17 wrote:

Make a detailed inventory, determine your best price for each specific coin or bar, and make notes of how you determined that price.

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That is a key point.   Even if you are just estimating, the more organized and detailed you are, the more likely an IRS auditor would accept your estimate without any hassle.  

[kjs94gt]

Thanks for all of the responses. I really appreciate it. We are indeed going to be selling some of it to put toward secondary education for grandchildren of the donor. I think I have enough information to at least be pointed in the right direction. I am going to have to try to locate any receipts possible for any of the purchases. If I can't locate them, I'll have to put some work toward looking at any dates on the coins/bars to determine their average value during when these things could've been minted. If I am unable to determine what he paid, or what something's age is to determine it's average value, I'm going to just have to assume what it was worth and the approximate timeframe he bought them.

Final question: since I've never dealt with buying/selling gold bars, explain to me like I'm 5 years old:

When we do sell in the near future, how would the IRS even know what we've sold and why would I need to report it?

[Opus 17]

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@kjs94gt wrote:

Final question: since I've never dealt with buying/selling gold bars, explain to me like I'm 5 years old:

When we do sell in the near future, how would the IRS even know what we've sold and why would I need to report it?

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Because the income tax system is mostly run on the honor system.  You expect your neighbors to be honest and pay what they owe, and in return, your neighbors expect you to be honest and pay what you owe.  In most cases, a coin dealer will not be required to issue you a 1099 or other tax statement reporting the sale, so you are on your honor to report the taxes.

There is a banking requirement that banks report transactions over $10,000.  This is automatic, but the information goes to the IRS and can trigger an audit, although no one quite knows how the selection system works.  If you sell more than $10,000 worth of the gold and split the bank deposits up into several smaller deposits of less than $10,000 each, that is a separate crime called "Structuring" which is illegal even if the underlying transaction is perfectly legal.  Penalties can include forfeiture of the structured deposits.

And of course there is the threat of audits and penalties.  The penalties and interest for under-reporting your tax is about 1% per month, retroactive from when they catch you to the filing deadline when you should have paid the tax, plus an additional penalty of 25% or more if they allege the under-reporting of tax was deliberate fraud instead of an honest mistake.  

The IRS method for selecting returns for audit is secret.  But let's suppose two scenarios.

1. You don't report the sale at all, but you have a large cash deposit into your bank account.  Someone might get curious.

2. You report the sale and a large amount of sales proceeds, say $50,000.  (That's only 25 ounces today.). But you report that all the gold was bought in 2019 for the same price, so you don't actually owe any tax.  That might be normal for a gold speculator, but if you have never shown any interest in such trading before, that might also get someone curious.

[kjs94gt]

@Opus 17Makes sense when you explain it that way. I had no idea. Thanks for taking the time to type it all up.