Money: Policing Precious Profits

In case you hadn't heard, a new regulation requires precious-metals dealers to report all of your bullion sales to the Internal Revenue Service. The regulation could radically change the way gold and silver are bought and sold. Even before the regulation took effect on July 1, it had given rise to enormous furor and confusion within the coin industry. It also set off a rush into numismatic (rare) coins, which are exempt from the rule.

The new regulation requires precious-metals dealers to keep records of customers' transactions and to provide the IRS with names, addresses, Social Security numbers, and the amounts paid. For the time being, dealers—whom the IRS defines as commodity "brokers" subject to the reporting requirements of last year's tax act—need report only their purchases of metal from customers, but not their sales to customers. An IRS official claimed that the agency has the statutory authority to demand reporting of all transactions, but "in an effort to lessen the burden we're not requiring that."

For the first year, precious-metals dealers can file "aggregate" reports of each customer's total annual sales. But in 1984, they must begin reporting each individual transaction.

Numismatic coins—coins that trade for a substantial premium over their metal content due to their rarity—have enjoyed a price surge in the wake of the new regulation. That's because, as the IRS official confirmed, the regulation "has no effect at all" on rare coins. The result was inevitable: "You can't even touch US gold coins," observed Mark Watts, owner of Gaithersburg Coin Exchange in Maryland. And Walter Perschke, president of Numisco, Inc., of Chicago, estimated in June that common-date US gold coins had risen by 20 percent within three weeks "entirely" due to the IRS regulation.

Despite all this, however, potentially useful ambiguities abound in the new regulation. For example, there is considerable dispute between the IRS and lawyers for major metals dealers over whether the law or the regulation really applies to bullion coins such as the Krugerrand or even to pre-1965 "junk silver" coins. Also, Section 311 of the Tax Equity and Fiscal Responsibility Act seems to apply primarily to stock and commodity brokers. But precious-metals dealers complain that the IRS has gone beyond the intent of Congress in defining them as "brokers."

"It's a clear case in which the IRS has gone far beyond the intent of Congress and created a nonenforceable regulation," declared Joe Cobb, a minority staffer on the House Banking Committee. "The intent of the law seems to apply to futures contracts, but the regulation is written to apply not only to commodity contracts but to the physical trading of anything the contract covers."

According to an official in the IRS Legislation and Regulation Division, a person who buys Krugerrands is "really buying and selling a commodity. It's a gold transaction, not a coin transaction." Burnett Anderson, Washington correspondent for Numismatic News, concurs. "Congress made it sweeping," he said. "It's clear they wanted to get at these big profits in hard assets."

But others maintain that the IRS's own regulatory language exempts bullion coins from the reporting requirement. The IRS defines "commodity" as "any type of personal property or an interest therein…the trading of regulated futures contracts in which has been approved by the Commodity Futures Trading Commission."

Well, there are no futures contracts in Krugerrands or any other kind of gold coins. An application was made to the CFTC last year but was withdrawn. There used to be a contract for bags of silver coins, but that contract has long since gone into suspension.

For that reason, James Hildebrandt, manager of Deak-Perera (Washington), declared, "We're taking the view that bullion coins are not reportable. We will not take [names and identification] unless we're required to." He added that the IRS "may have thought they wrote the regulation [to encompass bullion coins], but that's not what our lawyers say."

The regulation doesn't change the legal obligation to report capital gains in gold, silver, platinum, and so forth. Presumably it will make it easier for the IRS to enforce collection. But the IRS will be snowed under with masses of undigestable reports from every mom-and-pop coin shop right up to the big-time dealers. Then, too, at least until the IRS begins requiring the reporting of both ends of the transaction, it must rely on taxpayer oaths—the taxpayer's own unprovable assertion as to his original purchase cost—as the "basis" for determining gains or losses.

Luis Vigdor, the head of the recently formed Industry Council for Tangible Assets (ICTA), thinks that many precious-metals investors who believe in paying their taxes will nevertheless be loathe to subject themselves to the reporting requirement because of privacy considerations. Not only is there an element of risk in having your name, address, and holdings on record for any number of people to see, but many "really don't want to be on record because they remember that gold was once confiscated."

Because of such concerns, it is very likely that a black market in unreported precious metals will spring up. People will sell their holdings through the want ads, through underground dealers, and in Canada. Unfortunately, this will hurt many of the sound, existing firms. "What's going to happen is that the larger and better organized dealers' business is going to fall off dramatically," predicted Cobb, "because people are going to start looking for the most surreptitious ways of buying and selling."

On the other hand, Watts suggested, "Maybe people will resent it so much they'll go after gold even more." Glen Kirsch, partner in International Financial Consultants of Bethesda, Maryland, observed, "If people want something bad enough they'll get it. Sooner or later, someone finds a loophole." The numismatic loophole, through which many have already climbed, is a potential area for further profit, particularly once underlying gold and silver prices begin to rise with the likely revival of inflation next year.

So if you intend simply to buy and hold, or if you swap in and out of gold and silver, you probably need not have your transactions on record.

Steven Beckner is a financial reporter and columnist for the Washington Times.