Traps to Avoid in Converting Unallocated to Allocated Metals

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In the last
few months, I’ve received dozens of inquiries from readers
who wish to convert their “unallocated” holdings of gold
or precious metals to “allocated” form.

What’s
the difference? “Allocated” storage means that a bank
or warehouse has specific coins or bars that you own set aside.
“Unallocated” storage means that you have an ownership
interest in a precious metals pool. Because unallocated storage
is less expensive, it’s the preferred storage option for many
investors. On the other hand, because with allocated storage you
own specific coins or bars, many investors prefer this option.

I’m not
going to wade into the debate as to the merits of allocated verses
unallocated storage. Both have their place. Rather, I’ll address
what you need to consider if you plan to convert unallocated precious
metals to allocated metals.

#1. Many if
not most companies that offer unallocated storage for metals will
treat the conversion of unallocated holdings for allocated holdings
as a sale. For U.S. persons, that’s a taxable event at a top
rate of 28%.

#2. If you
take personal delivery of allocated metals from a facility classified
as a “bonded warehouse,” when you sell the metals, the
buyer may demand an assay. This can be an expensive process representing
several percent of the metals’ value.

What’s
the best way to deal with these issues? To avoid tax on the conversion
of metals from unallocated to allocated form, consider a “1031
exchange.”

According to
Section 1031(a)(1) of the U.S. Tax Code:

“No
gain or loss shall be recognized on the exchange of property held
for productive use in a trade or business or for investment if such
property is exchanged solely for property of like kind which is
to be held either for productive use in a trade or business or for
investment.”

Section 1031
lets you defer paying federal capital gains taxes when you sell
an investment property and buy another one of “like kind”
through an approved exchange transaction. To have a fully deferred
exchange, the property you acquire must be of equal or greater value
to the property you sell.

Almost any
like-kind investment property can be exchanged, including precious
metals. In addition, the holdings you exchange in a 1031 transaction
must either all be in the United States or all involve foreign properties.
You can’t exchange a domestic property for a foreign one, or
vice-versa.

The difficulty
with a 1031 exchange for precious metals is finding what the IRS
calls a qualified intermediary (QI); in effect, a “middleman”
to handle the money. And even if you do find a QI willing to handle
a conversion of unallocated to allocated metals, you need to make
sure that the company storing your metals will go along.

The following
rules must also be followed:

  • The metals
    must be “like kind.” For instance, IRS has stated that
    the exchange of Mexican 50-peso gold coins for Austrian 100-corona
    gold coins qualified for a 1031 exchange. On the other hand, the
    exchange of bullion-type coins for numismatic coins didn’t
    qualify.
  • You must
    sign the exchange agreement with your QI before selling the unallocated
    metals.
  • Within 45
    days after selling the unallocated metals, you must identify allocated
    metals you wish to purchase.
  • You have
    a maximum of 180 days to complete the sale.

What about
avoiding an assay upon selling the metals? If you can avoid taking
personal delivery, and keep the metals at all times in a bonded
warehouse, you can generally avoid the need for an assay. If you
do take personal delivery, make certain the metals come with a certificate
of authentication from the refiner and (in the case of bars) are
imprinted with the refiner’s serial number. These items give
a prospective buyer assurance that the metals you’re selling
are genuine.

Have you recently
converted unallocated to allocated metals? Were you able to do so
in a 1031 exchange? And if you eventually sold the metals delivered
to you, did the buyer insist on an assay?

Please
comment
– I’d love to hear about your experiences.

Reprinted
with permission from The Sovereign
Society
.

December
16, 2010

Mark Nestmann is a journalist with more than 20
years of investigative experience and is a charter member of The
Sovereign Society's Council of Experts. He has authored over a dozen
books and many additional reports on wealth preservation, privacy
and offshore investing. Mark serves as president of his own international
consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides
international wealth preservation services for high-net worth individuals.
Mark is an Associate Member of the American Bar Association (member
of subcommittee on Foreign Activities of U.S. Taxpayers, Committee
on Taxation) and member of the Society of Professional Journalists.
In 2005, he was awarded a Masters of Laws (LL.M) degree in international
tax law at the Vienna (Austria) University of Economics and Business
Administration.

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