In a message dated 2/29/2008 2:15:46 P.M. Eastern Standard Time,
d_richheimer@yahoo.com writes:
I am not a CPA but the following may be helpful in questioning your
CPA and other authorities. You stated "The purchase of Gold Bullion
or Gold coins is NOT reportable to the IRS. Any gains made from the
purchase of the Gold IS reportable (by you) and treated as capital
gains,..." I agree that according to current practice (although not
entirely clear under the tax code, etc.) such a purchase is not
taxable. However how does selling the coins differ from redeeming
points from a different casino which gives cash for points? The
argument for non taxability is that the cash represents a rebate of
supposed gambling losses not income. Possible analogues are if you
received a "valuable item" redeeming the old S&H green stamps and
sold it. It could be argued that the "valuable item" was merely a
rebate on other purchases and not income and selling the item for not
more than its value when you received it should not be income.
Another analog is if you received a bakers dozen of doughnuts for the
price of 12 and sold the 13th. It is more problematic making such
argument in the points received for gambling area, because points are
not directly related to net cost (win or loss) and perhaps should not
be deemed non taxable rebates.
A couple of points. The tax law is very clear that anything of value you
receive is taxable unless specifically excluded by law. There are some
problems in that you would have to assign a value to it and that might not be what
you paid for it with points. For example, if you win a cruise and the casino
says it is worth $5,000 but you can prove you could have acquired it for
$3,500, then only $3,500 is taxable. If you paid a premium for the gold, you
could use the lower amount if you can prove it. The income would be taxable
when you purchased the gold. There would be no basis since you paid nothing for
the gold. The risk in being "creative" in determining the income is that if
you underpay the tax by more than $5,000 there could be the risk of it being
classified as fraud. You don't want to go there. When you sell the gold,
your basis would be what you reported as income when you acquired the gold.
As for your assertion that the sale of the coins results in capital
gains, it is not necessarily correct. In the example of the players
who get 50 or so coins and immediately sell them on eBay, the coins
would fail to meet the definition of a capital asset and would be
characterized as inventory (items held for sale as opposed to for
investment). However in such case, cost which is related to basis
would control the amount of net income (capital or ordinary). Based
on a rebate theory your cost would be your gambling loss, but, if
such theory does not apply, your cost may be zero. In any event the
IRS may have difficulty arguing that cash received from redeeming
points is not taxable, but merchandize received for points and resold
for not more than its value when received results in taxable income.
If someone acquired the coins and immediately sells them, it is a moot
point. Even if they treated the sale as capital gains, it would be short-term and
taxable as ordinary income. The IRS would have no problem arguing that you
have income, the only discussion would be the amount. Once again, if someone
bought the gold and immediately sold them, it would say the amount received
in the sale is taxable. If someone was still holding them, it would say it
would be the purchase price as income unless you can prove otherwise. You
would have a real problem trying to offset against gambling losses unless you
got a real green agent. Someone can treat the transactions anyway they want on
their own return but they do need to understand that they could have a
problem in the future is they become too "creative". Pleading ignorance only gets
someone so far.
I do want to point out that MS has been very aggressive in banning players
who abuse their system. Players have been banned and had their points removed
for buying things (coins, gift cards, etc.) with the intent of and reselling
them. Not worth it to me.
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