taxation of offshore metal holdings (USA)

randyfloyd
By randyfloyd on Wed, Jan 9, 2019 - 11:32am

Hi, I am researching the viability of offshore metal holdings, and I'm trying to understand taxation (in the US).  There seems to be some confusion (at least in my mind!) of whether the holdings need to be reported to the IRS or not.  In other words, if I hold gold or silver in a foreign vault, is it required for these holdings to be reported?

It appears that rich folks can store wealth abroad, but it is perhaps more difficult for us regular people.  I certainly don't want to end up in tax court, but then again I imagine that reported gold holdings could be subject to confiscation, which essentially makes these offshore accounts not worth the hassle.

Would love to hear any concrete info and/or sources.  Thanks!

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bronsuchecki's picture
bronsuchecki
Status: Bronze Member (Offline)
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Posts: 89
Reporting and Tax

Below is the text from an article I originally posted at http://research.perthmint.com.au/2015/12/18/a-way-around-fbar8938-reporting-using-locksmart/ but which the Perth Mint has subsequently taken down. This will give you some further info and links to follow up. Just one comment - just because metal may not be reportable under FBAR or Form 8938 does not mean it is not taxable. My understanding is US taxes worldwide income, so if you have gold offshore and sell it at a profit, that gain is taxable, doesn't matter if the gold or money never comes back to the US.

I am often asked by US residents whether precious metals are reportable under IRS and FinCEN foreign asset/account reporting obligations:

  • Form 8938, Statement of Specified Foreign Financial Assets
  • FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

According to the IRS comparison of these requirements, “precious metals held directly” is not reportable.  So what does “held directly” mean? The IRS’ own Q&A confirms that safe deposit boxes are not reportable but otherwise provides no explanation of the term.

Mark Nestmann says that “direct ownership means you don’t hold the assets in any type of account” and that “assets you hold in a box at an offshore private vault to which only you have access may also to be non-reportable” but that “you must report offshore holdings of physical gold offshore to which you don’t have exclusive access on the FBAR”  (my emphasis).

Simon Black confirms this interpretation, saying that “gold in a ‘gold account’ does need to be reported, like GoldMoney. But storing coins or bars in a safety deposit box offshore does not”.

The most detailed analysis I have come across is from Michael DeBlis, III, Managing Partner at DeBlis Law, who, like Nestmann, sees access as the key to determining reportability:

“In a case where unrestricted access is granted by the owner to the foreign financial institution (or person engaged in the business of banking), it would indicate that the vault is a financial account and an FBAR is required if the currency notes exceed the reporting threshold. On the other hand, where the owner maintains exclusive control over the vault and does not give the foreign financial institution (or person engaged in the business of banking) access, reporting currency cash notes stored in such a vault is not required regardless of value.” (my emphasis)

This means that to avoid having to report your offshore gold and silver you need to store it in a safety deposit box, or similar, to which only you have the key such that the custodian/operator does not have unrestricted access without you being there.

Of course the problem with this arrangement is that if you need to sell your metal, you have to fly over and physically visit the storage operator to withdraw your metal so that it can then be delivered to the bullion dealer (which may be the same person operating the facility). This obviously adds significantly to the cost and makes such transactions uneconomic.

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randyfloyd
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Posts: 6
re: Reporting and Tax

thanks Bron, you are a wealth of information in this area.

While I am not trying to evade taxes, merely having the government know about any future gold holdings I might hold abroad makes the situation less desireable.  I imagine it could bring undue attention to my taxes (audit?!) and leave the metals open for confiscation should this occur in a crisis.  Crisis situation is the only real reason I would hold overseas gold, so maybe I might as well just own a physically-backed vehicle such as PHYS or BAR or AAAU.  Might as well just store personal holdings in the domestic vault and not deal with questions from the IRS or any international risk.  Please feel free to correct my thinking if you see fit.

However, I came across a service recently, I think in Singapore, that is exclusive access, but they hold the keys for you.  Perhaps in a pinch, one can designate them to access your gold, but the idea is that the owner has sole access.  Maybe this is a 'loophole'?

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bronsuchecki
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Posts: 89
Privacy and tax avoidance

I agree with you about privacy, the less people know the better, government or otherwise. Yes, having to report assets (metal or otherwise) offshore may increase your chance of being flagged by the IRS for an audit.

I mention the tax issue because many times talking to clients it was clear they saw privacy = can avoid tax. For example, I remember some clients asking to wire USD directly to the Perth Mint's Australian bank as they thought this would make it not visible to US government (not understanding the USD just went to the US correspondent bank of the Australian bank).

It may seem obvious, but many I spoke to didn't think of it, but if you get audited they will go through your bank transactions. Having metal offshore in a non-reportable safety deposit box won't help when the IRS asks what was that $100,000 wire to ABC Bullion in Sydney? They only true way to get total privacy is to buy anonymously in cash from a local coin dealer below any reporting threshold. Needless to say that is not possible with offshore and would take time even if done domestically.

With the physically-backed vehicles you mentioned, while the gold and legal structure may be offshore, if you are trading it on a domestic exchange it may get "locked up" in any financial crisis. That will only be an issue if you are likely to want to sell it.

With regard to confiscation, the advantage of offshore is that is just makes it that little bit harder for the government to get, so they may go for easier stashes first, like GLD. I had one client explain to me that the reason he had metal with Perth Mint was just that it would add a delay in the process, by which time the crisis is over or he could get it moved elsewhere. For example, the Mint would occassionaly receive phone or emails from US police or FBI etc asking whether X had an account. The standard response was to say apply to an Australia court for a court order to get us to reveal the info. This was not just because of privacy requirements but also because how the hell could we know whether this person was legitimate and/or had a legitimate right to the info. I would imagine that any responsible bullion dealer would follow the same process to cover their arse (something to ask them as you investigate various offshore dealers). In a lot of cases it never went anywhere because the investigator was just fishing.

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randyfloyd
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Posts: 6
privacy and tax avoidance

much to think about.  what if one were to buy using bitcoin instead of wire transfer?

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MGRS
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Posts: 26
overseas physical vs PM securities
randyfloyd wrote:

While I am not trying to evade taxes, merely having the government know about any future gold holdings I might hold abroad makes the situation less desireable.  I imagine it could bring undue attention to my taxes (audit?!) and leave the metals open for confiscation should this occur in a crisis.  Crisis situation is the only real reason I would hold overseas gold, so maybe I might as well just own a physically-backed vehicle such as PHYS or BAR or AAAU.  Might as well just store personal holdings in the domestic vault and not deal with questions from the IRS or any international risk.  Please feel free to correct my thinking if you see fit.

(Not financial/tax/legal advice)

1) IRS/FINCEN reporting threshold is $10k for overseas holdings, as I understand it.  While that's not enough to make you rich, it may be enough for a fresh start somewhere if things go pear-shaped.  If your holdings rise in value and exceed that $10k at any time, you have to disclose.  

2) Physical holdings overseas often would require a foreign court order in the case of US confiscation.  Puts an extra layer of bureaucratic difficulty between a siezure and your PM.  Some vaults have contractual language that they will not sell your holdings to fulfill a foreign confiscation order, even if you tell them to (coercion clause). 

3) Overseas holdings are still subject to all applicable US taxes.  Capital gains/collectibles taxes.  You already mentioned, but I'll reiterate - pay your taxes. 

4) Bitcoin is not anonymous.  It can be tracked rather easily if the investigator has the tech knowledge and subpoena power.  It adds a layer of privacy only by muddling the trail, not by making it un-followable.  If someone looks hard enough, they will most likely be able to follow it.

5) Securitized PM's are subject to all kinds of regulatory rules that could easily be changed, either by legislation or bureaucratic fiat.  Not to mention solvency and malfeasance risks.  But they are easy to buy and sell.  There's been a lot of virtual ink spilled on the shortcomings of securitized PMs, including at this site.  But basically you can't trust them, or the rules governing them, especially if things get hairy. 

I think there's definitely a place for both foreign and domestic physical storage to spread some of the above risks.  Perhaps a small foreign holding, with the rest of your physical held domestically.   And perhaps securitized (PHYS, PSLV, etc) PMs for trades in and out, especially in a tax advantaged retirement account. 

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bronsuchecki
Status: Bronze Member (Offline)
Joined: Apr 22 2012
Posts: 89
MGRS wrote: 1) IRS/FINCEN
MGRS wrote:

1) IRS/FINCEN reporting threshold is $10k for overseas holdings

The FINCEN FBAR is $10k but the IRS Form 8938 is $50k and higher depending on the person reporting. In both cases metals "held directly" is not reportable. One strategy would be to open a reportable account offshore but on your visit to set it up (and I strongly recommend physically visiting your proposed offshore custodian to kick the tyres, and part of the trip costs can be tax deductible) but at the same time set up a safety deposit box and put metal your bought locally with some of your "holiday" spending cash. Every time you visit to audit your holdings you can buy and add more metal to your deposit box.

MGRS wrote:

2) Some vaults have contractual language that they will not sell your holdings to fulfill a foreign confiscation order, even if you tell them to (coercion clause).

I've seen one service specifically promoting this feature, but the name slips my mind at this time. Just be careful that the wording doesn't give them too much discretion on what consitutes "coercoin".

MGRS wrote:

4) Bitcoin is not anonymous.

It used to be reasonably anonymous but with heavy data analysis tools now being applied they really can track flows well, even through mixing services I believe. You also still have the issue of the US dollars going to a crypto exchange being visible to authorities.

MGRS wrote:

5) Securitized PM's are subject to all kinds of regulatory rules that could easily be changed, either by legislation or bureaucratic fiat.

The general criticism of ETFs is that they don't have the gold. I'm not a believer in this theory as it is too easy for such a fraud to be discovered. The legal issue MGRS notes is the real issue with these. See the diagram on page three of this analysis http://www.perthmintbullion.com/au/Blog/Blog/12-11-30/ETF_Price_Suppress... I did a while back and think if is there is an issue that all those parties involved in an ETF's operation will be blaming each other and it will take years for that to get resolved.

Having said that, this doesn't mean you only want one counterparty involved. You want the custodian to have someone else providing oversight/audit, so it is a balance of independent control/review and not having too many involved for blame shifting.

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