Discrimination Against Coins Ever End?
By David L. Ganz
and investing was changed, for more than a
generation, when the 1982 Tax Equity and Fiscal
Responsibility Act (TEFRA) was passed by
Congress. One small section of the law for
practical purposes prevented placing rare coins
and some other collectibles in Individual
Retirement Accounts or Keogh accounts, and also
changed the way gains on collectibles were taxed
under the Internal Revenue Code.
Most hobbyists probably don't think about this
until after they have sold their coins and then
realize the discriminatory tax rates that are
This may be about to change as Congress has
before it legislation that would lower the
capital gains rate on collectibles, something
that the Industry Council for Tangible Assets
has announced again as a stated legislative
Since 1982, and the passage of section 408(m) of
the Internal Revenue Code of 1954 (now the Code
of 1986, as amended), rare coin investments in
individual retirement accounts has been
prohibited by legislatively declaring that such
an investment acts as a taxable distribution,
causing the holder all kinds of financial
Capital gain taxation on collectibles has also
been higher than it has been for stocks or bonds
- which sort of directs investment capital in a
particular direction, instead of making it a
As long as a trustee for a private pension is
satisfied that rare coins are a prudent
investment, not only has their use been
appropriate, it has never been expressly
disapproved. But in arriving at that decision,
the gain or loss, and amount of taxation, has to
be taken into account on eventual resale.
None of this is a guarantee that rare coins will
go up in value or that they will not lose their
value; the same is true of stocks and bonds. The
trustee's responsibility is to have assurance
that the investment vehicle chosen has the
opportunity for safe growth and that the choice
has been carefully considered.
Americans lost an important investment option -
the right to put rare coins and some other
collectibles into self-directed individual
retirement accounts (IRAs) and Keogh accounts
(the 401-K plans that are so popular among the
self-employed, and some businesses) - with the
passage of TEFRA.
Those who were involved in the coin market at
the time remember the consequence: a precipitous
decline in coin prices as a once fertile ground
for placement of assets dried up as a potential
For a number of years since, a coalition of
interested parties, led by ICTA has led the
battle to overturn a small portion of the 1982
TEFRA legislation, which makes it useful to
examine what brought about the prohibition, and
why the right should be restored.
Named for Rep. Eugene Keogh of New York, the
Keogh account was intended to provide small
businesses with the equivalent of a pension -
but without the heavy regulation that
accompanies plans run by much larger companies.
At one time, a proprietor could contribute up to
$30,000 each year to such a plan - and defer the
tax due on the income of the sum set aside until
retirement, or when the account was drawn
Designed to supplement pensions and Social
Security, the plans were intended for long-term
retirement planning, and severe penalties were
imposed to make certain that the retirement
plans were used as intended.
Still later, those who were not self-employed or
working for small companies that lacked pension
plans were allowed to set up their own plans
known universally under the IRA acronym, and
initially set aside up to $2,000 a year (also as
Subject to some qualifications, in 2009
contribution limits are now $5,000 annually.
However, if you will be 50 or older by the end
of the year, you can contribute an extra $1,000,
for a $6,000 total contribution limit.
Deferred compensation means that it isn't taxed
now, but rather is taxed when it is withdrawn,
typically as part of an actuarially sound plan
after a person reaches retirement age. The tax
is paid on the sum withdrawn based on
then-current tax rates.
Those who draw upon the resources before
reaching age 59� are subject to premature
withdrawal penalties that include an immediate
surtax on the sum withdrawn, the indignity of
having to also pay income tax on the sum
removed, and a prohibition against making
further contributions for a period of five
Virtually all of the plans that were set up were
self-directed, meaning that the owner had the
right to designate how the funds were invested.
The choice could be a simple bankbook which,
back then, was paying 5 percent simple interest,
the equities (stock) market, corporate bonds,
real estate mortgages, real estate, rare coins -
or in fact virtually any asset not otherwise
illegal to own.
Wall Street's dirty little secret is that
billions of dollars went into the equities
market with the self-directed plan as a source.
Buy-ins were cheap - the government was in
essence a partner for the marginal tax rate and
there was no capital gains tax (because it is
collected only based on distributions).
Now here's a novel result: the government sets
up a system that allows unfettered investment
virtually without regulation or taxation, and
the equities market grows from a Dow Jones
Industrial Average of 1,000 in 1972 to a much
higher number that was in the 14,000 range in
March 2008 when I locked in the statistics of my
book Profitable Coin Collecting (Krause, 2008).
That contrasts to less than 9,000 today, but
there has been no particular clamor on the part
of Congress or the public to more heavily
regulate the stock market or for that matter to
protect IRA or Keogh owners against dramatic
TEFRA was genuine tax reform by the Reagan
Administration, and substantially reduced the
taxes that most Americans paid. It also made a
list of prohibited acquisition assets for all
self-directed retirement plans.
Reasons cited for the prohibition: the assets
weren't productive, and simply did not help the
economy. The underlying rationale: the assets
were risky, and people also shouldn't be able to
put a retirement asset in their homes, on their
walls, or even be able to enjoy them before they
were taxed on the consequences - the ultimate
Puritan work ethic.
Now, who would have been the proponent of such a
move to prohibit placing collectibles such as
oriental rugs, rare coins and scotch whiskey
into a retirement plan? Probably not rug
manufacturers or antique dealers. Most likely
the distilled spirits industry didn't propose
it, either. Hmm .
Penny stocks and junk bonds that were highly
volatile were permissible inclusions in a
retirement account - even if it was highly
likely that a pensioner would lose his shirt
before he saw a profit.
Intelligent people can draw their own
conclusions from facts and arguments, and who
sponsored the proposal probably doesn't matter
anyway. They left no fingerprints; just a lot of
Practical effect of the ban that took place was
an immediate coin market disruption - just as if
the government had said that you could no longer
buy and sell real estate in your own name and
had to only do it corporately.
Prices plummeted, because a major buyer category
(those with IRA and Keogh assets) was removed
from the marketplace, without warning, and
without replacement plans on the drawing board.
(It's worthwhile noting that non-self-directed
plans can and do still include rare coins in
their portfolios, but that requires an
independent trustee to make the decision, to
determine that it is prudent to do so, and to
assume full liability if it is not. Some, but
not many, are willing to make that choice.
About the only fortuitous result of this is that
a National Association of Coin and Precious
Metals Dealers was founded to help fight future
assaults on the hobby, and later, an Industry
Council for Tangible Assets was born to have a
permanent Washington presence.
The NAC+PMD organization folded into ICTA a few
years later, and since then, the Washington
lobbying organization has saved the hobby's
proverbial cookies on more than one occasion,
including the attack by the Internal Revenue
Service on broker reporting, that at one time
threatened with ridiculous paperwork the sale of
even a simple silver Roosevelt dime.
By 1986, America had gotten into the business of
selling gold and silver to the public, and it
occurred to the best and the brightest that the
U.S. Mint's product line had a serious problem
in the investment community that sold the
If the vendor made a sale and sold 500 ounces of
silver as a bar, it could be kept in an IRA or
Keogh account. But if the item purchased was 500
silver American Eagle coins, the inclusion into
the IRA or Keogh account would trigger all of
the negative provisions of section 408(m) of the
Internal Revenue Code.
These included considering the purchase a
distribution making it taxable, with penalties
and prohibiting future additions for a five-year
period of time.
Sensing that there was good profit to be made,
and that there was not much difference between
500 ounces of brick silver and 500 silver
Eagles, there was intense pressure to change the
law relative to coins in IRAs.
And so on Oct. 11, 1986, the Tax Reform Act was
passed, replete with an obscure provision that
allowed Eagles to be placed in self-directed
In 1996, a platinum Eagle was authorized, but
for obscure legal reasons, a tax bill had to be
prepared to allow its inclusion in self-directed
retirement plans. That happened, and as
Goldline's Web site remarked, "The United States
government allows both proof and bullion
American Eagles to be utilized in IRAs.
Whether you prefer gold, silver, platinum, or a
combination, these official U.S. coins can be
added to your retirement savings by opening a
new IRA account or transferring funds through an
By the early 1990s, ICTA began to form a
coalition designed to achieve equity and
fairness in the treatment of the rare coin
industry, and appears to have finally beaten
back the non-productive asset argument. Small
What stock is ever productive? What stock
purchase ever created a job, except in the same
way that the sale of a rare coin creates one?
Yet in 2009, even as legislation has again been
introduced to change another TEFRA bugaboo -
making collectibles part of the 28 percent
capital gain rate - there is some increased talk
about trying to mount the IRA-Keogh fight to
allow self-directed pension money to have a
clear cut choice.
There are those who will argue that rare coins
have no business in a retirement account; that
purchasing silver has proven to be a bad
investment, that gold buying is speculative, and
that rare coins can't be accurately valued and
are prone to abuse.
The same can be said about stocks and bonds.
Take a real blue chip, like IBM.
The graph included with this column takes into
account IBM stock's price performance. It has
split three times since 1980; not counting
dividends, IBM's equivalent value per share
today (of a share held in 1980) would be over
$1,700. Also shown is the value of gold, silver
and the Consumer Price Index.
Because I have the data that Dennis Baker's
NumisMedia has so generously supplied, I've also
included comparisons with the Salomon Brothers
coin portfolio using numbers well-published here
over the last 20 years.
What it shows, by the way, for these MS-63
collector coins (no gold among them) is that
rare coins are still a top investment strategy
and maybe that's what those who oppose putting
them into Keogh and IRAs are afraid of.
All this sort of reminded me about the time that
I decided to add American silver Eagles into my
retirement account, both as a hedge against
inflation, as a strong affirmative statement
that coins can be an investment tool, and to
practice what I preach.
Silver had its ups and downs and came close to
equaling IBM's performance. - (Coins - the
numismatic component not allowed in IRAs - did
Will collectibles someday be taxed at a regular
capital gains rate? ICTA is trying to persuade
Congress of the fairness of this position. But
to fully understand what is being advocated, it
will help to recall what a capital gain is.
Capital gains are the amount by which an asset's
selling price exceeds its initial purchase
price. A realized capital gain is an investment
that has been sold at a profit.
An unrealized capital gain is an investment that
hasn't been sold yet but would result in a
profit if sold. The IRS change, if effected,
would relate strictly to coins and precious
metals that are sold.
The tax rates on net capital gains were recently
reduced by Congress . Before the law was
changed, the maximum tax rate a person paid on
their capital gains was 28 percent. This was
truly a tax break if your top tax rate was 31
percent or higher, but if you fell into the 15
percent or 28 percent brackets, you received no
tax benefit from the maximum capital gains tax
Today, investors can keep more of the profits
from the sale of their capital assets. The new
rate (for 2010) is 20 percent maximum but not
for collectibles. If you end up in the 28
percent or higher tax bracket, the maximum tax
rate that will apply to most of your capital
gains is now 20 percent. If your tax bracket is
15 percent, the maximum tax rate that will apply
to your capital gains is 10 percent.
Therefore, unlike before, taxpayers in all tax
brackets will reap the benefits of the lower
capital gains tax rates - unless you are placing
your investments in collectibles, where the
capital gains tax is still locked in at 28
Prior to 1982, rare coins were considered an
investment vehicle, as was the purchase of
bullion. It then was exiled to non-preferred
status. How non-preferred: Long-term investments
in collectibles are taxed at a flat 28 percent.
Short-term investments in collectibles are taxed
as short-term capital gains at your ordinary
income tax rates.
Put in the federal "blue book" in 2005, named
for its overview which quantifies federal budget
plans, the proposal is called "Simplify taxation
of capital gains on collectibles, small business
stock and other assets".
It proposed changes to a long-term old policy of
classifying and taxing collectibles differently
than other investment assets. Under existing
rules, in 2009, taxpayers in the 10 and 15
percent brackets would have qualified for a zero
percent tax rate on long-term gains.
According to the budget analysis, "Capital gains
are generally taxed at the same rates under the
alternative minimum tax (AMT) as under the
regular tax. Special rates apply to capital
gains on certain small business stock,
collectibles, and certain real property."
Under the Internal Revenue Code of 1986 as
amended, "collectibles" include works of art,
antiques, stamps and coins, metal or gems,
alcoholic beverages, and other tangible personal
property defined in Treasury-issued regulations.
Reason given for the change in the budget is
that governmental filing requirements are
difficult. The message says, "Schedule D and the
associated forms and instructions are more
complicated than necessary because of the
special 25 percent and 28 percent rates that
apply in only a small fraction of cases."
The government is obviously concerned with how
you spend your time accounting for tax dollars
that need to be paid. "For example, the 28
percent rate requires an extra column on
Schedule D and two worksheets of 51 and 7 lines,
but affects only about 1 percent of taxpayers
with capital gains (about 240,000 taxpayers)."
There are also complicated rules for calculating
how these provisions interact with other capital
gains and losses in particular cases. The report
continues, "Eliminating the 25 and 28 percent
special rates would simplify capital gains forms
and calculations. About one in five taxpayers
(more than 20 million) report capital gain or
loss in a given year, and more than twice as
many taxpayers report."
Provisions of the 1982 TEFRA law affecting
collectibles were added in a midnight
conference, without public hearing, which is
certainly legal and perhaps not even unusual -
but it took the coin industry by surprise.
I was at an ANA convention when we learned that
Congress was considering this legislation and,
in that pre-cell phone era, stood off the
convention floor dictating telegrams to the
Western Union operator that eventually cost over
$3,000 to have delivered - even though it was
after a key vote.
ICTA has lobbied for more than 25 years to right
the wrongs of TEFRA, including the taxation of
collectibles - and has since found friends in
powerful places. Before too long, it may well be
up for consideration to change the rate of
capital gain tax on collectibles, and to also
allow collectibles - coins in particular - back
in self-directed plans.
Whether that finally yields results will be up
to the tax-writing committees of Congress. And
to their constituents who care enough to write
their members of Congress asking for help
righting a wrong of a generation ago.