You've probably seen commercials on TV for companies that offer top dollar for your old gold jewelry, or maybe you've passed a guy on the side of the road, flipping a sign around that proclaims "We Buy Gold!" If you really don't wear your old gold jewelry anymore you might consider selling it for a quick buck, but Uncle Sam is going to want his cut.
The Internal Revenue Service considers all income that is not specifically exempted by law from taxation to be taxable income. This includes income from employment, income in the form of dividends and interest, royalty income and capital gains income. You get capital gains income from selling a capital asset for more than you paid for it.
The IRS considers virtually everything you own to be a capital asset. This is true regardless of whether you use the item for business, investment purposes or for personal pleasure. Your home, your car, your baseball cards and comic book collection, the money in your bank account and the stocks in your investment portfolio are all capital assets. So is your gold wedding ring, the gold pocket watch you inherited from your father and the gold coins in your safe deposit box.
You need to determine your basis for your gold before you sell it. This applies regardless of whether you are selling gold bullion, numismatic gold coins or old, broken gold jewelry. Your cost basis is the amount you paid for the item, including commissions, plus the cost of any improvements. An example would be if you added a larger diamond to your wife's engagement ring. The sale price is the amount you received in exchange for your gold. If you sold your gold for more than your basis, you have a capital gain. If you received less than your basis, you have a capital loss. While it might seem unfair, all capital gains are taxable while capital losses on personal property, such as jewelry, are not tax deductible.
Capital gains and losses are divided into two categories; long-term and short-term. Gold you have owned for more than one year prior to selling it is considered a long-term capital asset. If you owned the gold for one year or less, it is a short-term capital asset. This is important to know because long-term capital gains are taxed at a lower rate than short-term capital gains. You are required by law to report all capital gains. Figure your capital gains from the sale of your gold on Schedule D, Capital Gains and Losses, then transfer the results to line 13 of Form 1040.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.