If you took advantage of escalating gold and silver prices and made any sales of gold, silver, gems, jewelry, or the like during 2011, you are required to report the sales on your tax return. Whether or not the sales are subject to tax, and at what tax rate, depends upon the type of item sold and your tax basis for the item.
Determining Basis – Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market value of the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.
Types of Items Sold – Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.
- Jewelry – Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are, thus, not allowed and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year and the gain will be taxed at the long-term rate, which, for 2011 is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and, thus, may be taxed at a higher rate, as explained below.
- Collectibles – Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.
If you have questions related to selling jewelry and collectibles, please give the office a call.