Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer!
QUESTION #1: For tax purposes, is it true that -- even though these are Gold Eagles -- the valuation is based on the raw price of gold bullion at the time of distribution? In this example, the capital gain on the IRA account would be $112,891 - $66,964 = $45,926.65.
You can withdraw properties from your IRA penalty-free when you reach retirement age (age 59 1/2). For distribution purposes you can elect either to have the IRA sell the property or take an in-kind distribution of the property. The amount of distribution is a fair market value of distributed properties. In your example that would be $124,583. That value will be your basis if you sell the property after distribution.
There are no capital gains for properties sold inside the IRA. There are no capital gains if properties are not sold.
QUESTION #2: For 2011 tax purposes, can I subtract the entire loss of $17,930 from the gain of $45,926 and thereby pay taxes on $27,996? (It is true that some other miscellaneous income items affect the tax bracket, but generally it looks like about 25%).
If you made only pre-tax contributions into your IRA account – assuming traditional IRA - the total amount of distribution will be your taxable income. If you made after-tax contributions – that amount will be recovered tax free.
Whatever gain or loss you have inside your IRA account generally doesn’t affect your tax liability.
Your capital loss of $17,930 may be used to offset other capital gains. The taxable IRA distribution is not a capital gain. If you have net capital loss – you may use only up to $3000 to offset other taxable income in the current year and the rest will be carried forward to following years.
Let me know if you need any help or clarification.
As for QUESTION # XXXXX: The issue of "...fair market value" of the coins at distribution time is not trivial. During my previous research I did indeed find information leading me to think that the raw bullion price was the only sane way to value the gold eagles. So far I can't find that article again. But put yourself in the shoes of the IRS: If not the raw $/oz gold price, who gets to declare the value of a coin?Here is my thinking (and of course it could be a lot of hooey):(1) If I let Sterling Trust value the coins in my account (and they do provide a website that tracks account totals), the answer today is a valuation of $113,367. Hmmm. 79 x 1434 = $113,286 where www.Monex.com gold = $1434. VERY CLOSE!(Alas, Sterling Trust is closed for the day). The Sterling Trust online "valuation" of my account is NO WHERE NEAR the apparent "real" market "coin" value of 79 x $1582.62 = $125,026.98 but rather seems to use the raw gold bullion value.(2) Knowing the "real" market value of a coin at the time of IRA distribution is VERY difficult if the value is to be based on what some coin shop or dealer will pay. Indeed, the prices listed are usually what a coin shop will sell for -- not what they will pay. And prices vary considerably. Do I get to choose a "low internet bidder" or "nudge-nudge-wink-wink coin dealer" on the day of distribution? I certainly won't allow Sterling Trust to dictate what they think the "real" value is (and by the way, they wouldn't know because they are not coin dealers).So, I suggest there is more research to resolve this question. Perhaps six calls to the IRS so you can plot the stochastic distribution of answers.As for QUESTION #2: Sorry, I don't understand your answer. My income for the 2011 tax year is social security, a pension, and the HUGE extra taxable income represented by closing the IRA and being obligated to pay tax on the "up till now" tax-free IRA. So, if distribution of the IRA results in a positive, taxable amount of $45,926 ($45,926 is the approximate final IRA "value" minus the original IRA cost basis), how do I use the $17,930 loss? There are no other "capital gains". [NOTE: I'm not sure, but you maybe said "In your situation, ONLY $3000 per year of the investment loss can be applied to overall taxable income in single tax year. Ensuing tax years can each absorb $3000 of the loss. But this answer still kinda stumps me because to me the IRA distribution "profit" is taxable income.]Thank you for your response. [P.S. This will probably carry over into tomorrow. Have some fun tonight.]
But put yourself in the shoes of the IRS: If not the raw $/oz gold price, who gets to declare the value of a coin?Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.
So far – as long as the property is not sold - you may use an appraisal or expert’s opinion for determination of the fair market value. The IRS will not determine a fair market value for you and will not advise besides the regulations above. It is possible that in case of audit the IRS disagrees with your determination – If the difference indeed is substantial - you might end up in the court room and the judge will decide whose arguments are more valuable and which sources for FMV determination are more trustable.
As for QUESTION #2: Sorry, I don't understand your answer. But this answer still kind a stumps me because to me the IRA distribution "profit" is taxable income.]I fully understand your intention. The IRA cost basis is the amount of non deductible contribution. If previously you deducted all contributions into the IRA – your IRA cost basis is zero.
If your IRA cost basis is zero – the full amount of distribution is your taxable income and reported on the line 15b.
However – you may not treat the distribution from the IRA as a capital gain – that is a key issue either you like it or not.
If you concern about large tax liability – plan your distribution accordingly and avoid large distributions in any single year.
If you have a capital loss from the selling coins outside your IRA account – and that is your only capital loss – up to $3000 of that loss may be used to offset other taxable income.
You may plan the distribution from your IRA accordingly – for instance – you may distribute $3000 value of coins this year and $3000 value of coins next year to use your capital losses.