Permissible Exchanges. An actual trade through a dealer, either in person or over the internet, does not qualify as a legitimate tax deferred exchange. Certain technical formalities must be followed, including executing an exchange agreement with an Exchange Company to be effective. (see part 3)
Exchange bullion coins = bullion bars or ingots. Where the price is based on the precious metal content, bullion coins such as gold American Eagles may be exchanged for gold bars or vice versa of the same metal.
Bullion/Coins = ETF certificate. As long as the Exchange Traded Fund represents a fractional undivided interest in the underlying bullion, these may be exchanged in both directions of the same metal.
Bullion coins to bullion coins. Where the price is based on the precious metal content, bullion coins may be exchanged for bullion coins of the same metal.
Numismatic coins to Numismatic coins. While there are no rulings or cases on this point, we believe the treasury regulations support Numismatic coins to Numismatic coins exchanges under the same rules that apply to artwork and other collectible exchanges.
Exchanges between Gold and Silver. While there is a 1982 Revenue Ruling which disapproves of this type of exchange, we believe that the similar nature and character test in 1991 tax regulations support this type of exchange and supersede the 1982 ruling. Gold and silver share similar physical and chemical properties. Their primary use is the same as well. Our Company provides a tax opinion which will provide protection against penalties or interest from an IRS challenge.
Exchanges between platinum and palladium are possible as well since both metals share similar physical and chemical properties. Traditional use is the same as well. Our Company provides a tax opinion which will provide protection against penalties or interest from an IRS challenge.
Exchanges between Gold/silver metal group and Platinum/palladium is unclear at this time and not advisable.
Statute. Section 1031 of the U.S. Tax Code provides that when a property is sold and the proceeds are used to purchase a property that is like kind, the investor can defer the taxable gain by following the requirements of Section 1031.
The 1991 Tax Regulations Section 1.1031(a)-1(b) states the words “like-kind” have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not be exchanged for property of a different kind or class.
The fact that an asset is improved or unimproved is immaterial, it relates only to the grade or quality of the property and not to its kind or class.
For exchanges occurring on or after April 11, 1991.1 Treasury Regulation 1.1031(a)-2(c)(1) provides the general rule that an exchange of non-depreciable personal property ( such as precious metals) qualifies for non-recognition of gain or loss under Section 1031 only if the exchanged properties are of a like-kind. The notice of proposed rulemaking explained that these types of property were not divided into like classes because of the variety of such personal property and the lack of generally available classification systems.
The Tax Regulations do not provide any examples for an exchange of non-depreciable personal property, including exchanges of precious metals.