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Sunday, December 16, 2007

The Gold and Silver Taxation Scam

You might ask "If the dollar is so worthless, why don't people switch to using gold and silver"? The problem is red market regulations. There are quite a few laws and taxes that discourage people from using gold and silver as money.

First, gold and silver transactions are subject to capital gains taxes. If I trade a $20 bill for two $10 bills, that is not a taxable transaction. If I trade $800 for an ounce of gold, and later trade the ounce of gold back for $850, that's a taxable transaction. I owe $50 of capital gains. Really, I shouldn't owe capital gains, because I was just exchanging one form of money for another. The government disagrees, and it's been clearly established that such a transaction would be taxable.

Further, if I trade $800 in goods for an ounce of gold, and later trade that ounce of gold for $850 in goods, both transactions are taxable. This is enough of a hindrance to discourage using gold as money. The IRS has heavily cracked down on communities that start using gold as money.

Suppose I buy an ounce of gold for $800, and then the price of gold rises to $900/ounce. If I purchase something with that ounce of gold, I now owe capital gains taxes on the $100 gain. The real value of the ounce of gold is nearly the same. I was taxed based on the devaluation of the dollar.

Further, gold and silver are taxed as collectibles. If I buy some stock for $10,000 and later sell it for $20,000, I only owe a 15% capital gains rate. If I buy some silver for $10,000 and later sell it for $20,000, I owe a 28% capital gains rate. Gold and silver bullion are taxed as collectibles, like buying baseball cards. Gold and silver are not legally recognized as money.

Also, many "anti-money-laundering" regulations prevent people from operating an alternative monetary system. If you comply with all the regulations, the overhead is too much for a small business owner. If you don't comply with the regulations, you're committing all sorts of crimes. If you want to set up a competing monetary system, your only option is to work off the books.

I was thinking of buying some gold and silver as an investment, and as insurance against a collapse in the dollar. I looked around, and I realized that there were no retail stores near me where I could buy silver or gold coins. The reason is that if I buy silver or gold coins, even as an investment, I have to pay sales tax on the purchase. If I want to sell silver or gold coins, the only place to do so is at a pawnshop, where I'd be receiving a fraction of the value. In other words, it isn't practical for me to invest in physical gold or silver and take possession myself.

I could order on the Internet. However, there'd be a risk the vendor wouldn't be untrustworthy. There'd be an even bigger risk that the red market would know I have gold or silver stored in my residence. I'd still have to pay sales taxes, although it'd be unlikely the state could catch me. I still would have a problem selling, if I wanted to sell. Most Internet gold and silver dealers say they will repurchase at the bid price.

I considered buying on a futures exchange. The problem is that the delivery unit for one silver contract is 5000 ounces, a bit out of my price range. I read that if you buy a futures contract with a broker, and state you intend to take delivery, the broker will act like you're nuts. Further, if I had my silver stored in the exchange's warehouse, I'd have to pay a storage fee, and I'd be at risk for losing my silver in the event of an exchange clearing default. On the other hand, keeping my silver with the exchange would mean I could sell it easily. I could take physical delivery myself, but I wouldn't want someone knowing I had 5000 ounces of silver under my bed. If the delivery unit were 100-500 ounces, I'd consider it, but 5000 ounces is too much.

I don't trust the gold and silver ETFs, because they loan out their gold and silver for short selling. They could be stuck if there's a default.

Summarizing, the tax treatment of gold and silver is a strong disincentive for people to use gold and silver as money. When you perform a gold-denominated or silver-denominated transaction, any increase in the price of gold or silver, quoted in Federal Reserve Points, is treated as a capital gain or loss. Further, the taxation rate is the rate for collectibles, 28%, rather than the regular long-term capital gain rate of 15%. Anti-money-laundering regulations and banking regulations make it very hard for someone to operate a gold-denominated or silver-denominated bank.

Of course, if you want to perform a transaction without reporting it to the government, gold and silver are ideal. If you write someone a check for $10,000, that transaction is reported to the government. Several smaller checks is also reportable. If you make a $10,000 deposit or withdrawal in your checking account, that is also reportable. If you withdraw or deposit $10,000 cash from your bank account, that is reportable. If you give someone 10 ounces of gold, that transaction is hard to trace.

If you have a lot of money and want to dodge estate taxes, you could buy physical gold and silver and give it to your children. I don't have enough money for this to be practical. Really wealthy people have other estate tax avoidance schemes available.

It's a shame. I was thinking of buying gold or silver coins. Unfortunately, there are too many legal obstacles to setting up a gold or silver dealership. I can't make an anonymous cash purchase near where I live. I could buy on the Internet or on eBay, but that has its own risks. If I store physical gold and silver in my residence, there is the risk of robbery. If I use a bank safe deposit box, there is the risk that the bank would report my holdings to the government. I'm planning on buying some gold and silver as an inflation hedge, but there's no need to rush. My stock investments are a good inflation hedge until the final collapse approaches. I estimate the final collapse is still at least 20 years away.


Anonymous said...

You couldn't find a coin shop in your area? I live in UT, and I buy strictly "junk" silver (pre-1964 U.S. coins) and gold eagles. In both cases, I pay no sales tax. I have never bought any other type of bullion there, so I'm not sure if it's just because of the legal tender status of the coins I buy. I always deal with them in cash, and I can go and sell my metals. In cash, and totally anonymous. Untraceable.

I have been thinking about this lately, and it seems like a good way to get an underground economy started. Participants can trade their FRN's at the coin shop, after which the [U.S. legal tender] gold & silver coins enter the underground market.

Anonymous said...

I stay away from gold coins and other 'numismatic' gold like the plague. There are so many scammers out there who use the old 'gold coins are non-confiscatable' line of BS to lure in suckers to buy non-PCG rated coins often at a $200to $300 markup each. Don't fall for this scam! NEVER purchase any numismatic coin as a 'hedge' against inflation or the shrinking Dollar. Instead purchase .999 Fine Engelhardt bars in 1 or 10 oz sizes from reputable dealers. Especially these gold and silver coin dealers you hear on the shortwave radio 'patriot' shows as EVERY one of these people I've listened to are running a total scam and they inflate the value of their coins and troll for un-informed people and take them for hundreds and thousands in mark-up's. Remember buy Englehardt bars only and if they tell you that this is bullion or confiscatable tell them to go soak their head and go someplace else as anyone who tells you this line of BS is a scammer.

1/πi said...

Look into gold and silver smiths within the Society for Creative Anachronism (SCA). Some of them actually buy gold bullion, handcraft it into jewelry, and then sell it for a profit at regular events.

I've never known them to charge sales tax, so they may not be reporting to the IRS. You might contact a few to see how they run their businesses, though I doubt they realize the risk they're taking. Buying second-hand from them at a small markup aught to be profitable in the long run as the dollar collapses.

Anonymous said...

I bought silver for 2.50 under spot. went to coin store and was told they would give me 1.10 per coin. according to the silver value each coin was worth 2.00. to sell it back to the seller the per oz. of silver had to go up 7.00 per oz. to break even. for most of it's history that is huge increase in it's value and that does not include the taxes and record keeping. I suggest let your dollar go down the tube with inflation and keep life simple!

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