Recently, we’ve received dozens of inquiries from readers who wish to convert their “unallocated” holdings of gold or precious metals to “allocated” form.
In this article, we’ll talk about the advantages and disadvantages of allocated vs unallocated gold storage. We’ll also discuss what you need to know if you plan to convert unallocated precious metals to allocated metals.
Allocated vs Unallocated: What’s the Difference?
Banks or private vaults that take responsibility for storing your metals use two storage options: allocated and unallocated storage.
- Allocated storage means a bank or private vault has set aside specific coins or bars that you own.
- There’s also semi-allocated storage, in which you have a fractional ownership interest in a specific bar of precious metal.
- Unallocated storage means that rather than owning specific coins or bars. You have a fractional ownership interest in a pool of precious metals.
Allocated vs Unalllocated: What’s More Expensive? What’s Riskier?
Unallocated storage is much cheaper than allocated or semi-allocated storage. But, it’s also riskier. Since you don’t own specific bars or coins, you have no way to inspect your actual holdings.
Some companies that offer unallocated storage don’t even permit redemption in metal – you must accept a cash settlement.
Also, if a vault goes bankrupt, unallocated metals may become part of its balance sheet. This could expose your holdings to the vault’s creditors. You would then become an unsecured creditor and apply to the bankruptcy trustee for relief.
If You Want to Convert Unallocated to Allocated Gold
Here’s what you need to consider if you plan to convert unallocated precious metals to allocated metals.
- Most such companies treat the conversion of unallocated to allocated holdings as a sale. For US persons, that’s a taxable event at a top rate of 28%.
- 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 a 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. Also, 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). This means a “middleman” to handle the money. Even if you find a QI willing to convert 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. But, 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 buy.
- 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 time 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.
All About Gold Storage
What’s the best way to store gold – within the US and offshore. Please see our primer on how to store precious metals.
How to Ship Gold Internationally
Shipping gold overseas from the US might sound straightforward. But it can be quite a process. If you’re thinking about it, here’s what you need to know: how to ship gold internationally.
Gold IRA vs Physical Gold
Both a Gold IRA and physical gold involve owning physical metals. But there are notable differences between the two: Each option has specific advantages and limitations. Here’s what you need to know before you decide: Gold IRA vs Physical Gold.
Need Help?
Since 1984, we’ve helped more than 15,000 customers and clients protect their wealth. For its proven record as a wealth preservation tool, gold has often been a part of that planning.
If you’re looking to use gold for the same purpose, and aren’t quite sure where to start, please book a free, no-obligation call with one of our Associates to see if a wealth protection plan is right for you.
