Couple's gold discovery will be taxed at top federal rate

The Gold Country couple who unearthed at least $10 million worth of 19th century gold coins in their yard last year will probably owe close to half of that sum in federal and state income tax - whether or not they sell the coins.

There is no question that the discovery of the coins is a taxable event. In a famous 1969 decision, a U.S. District Court in Ohio ruled that a "treasure trove" is taxable the year it is discovered. In that case, Cesarini vs. United States, a couple bought a used piano in 1957 for about $15. In 1964, they found $4,467 in old currency inside it.

The court ruled that the money constituted ordinary income in 1964, the year in which they had "undisputed possession" of the funds. It did not qualify for the lower capital gains tax rate because neither the piano nor the currency were sold or exchanged.

In its 2013 tax guide, the IRS states, "If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession."

The couple, who have not been publicly identified, found the coins in cans buried in their backyard in February 2013. That means they will owe tax on the estimated value of the coins by April 15 to avoid a penalty and interest, says Leo Martinez, a law professor at UC Hastings College of the Law.

Most of the money will be subject to the top federal tax rate of 39.6 percent, which starts at $450,000 in joint taxable income.

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In California, the top rate - on joint income over roughly $1 million - is 13.3 percent. Taxpayers generally get a federal deduction for state income tax paid, reducing their effective federal rate.

That puts the total amount going to state and federal tax at about 47 percent.

The couple could try to argue that the find should be taxed as a capital gain on the grounds that "when they bought the property, it was part of the property and part of the acquisition price," says Arthur "Kip" Dellinger, a CPA with Cooper, Moss, Resnick, Klein & Co.

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Capital gains rate

Long-term capital gains are generally taxed at a top rate of 20 percent, but the rate on collectibles - which include gold and coins - is 28 percent. Starting in 2013, high-income taxpayers will owe a 3.8 percent Medicare tax on some or all of their investment income if their modified adjusted gross income exceeds a certain level ($250,000 for joint returns).

Dellinger says the capital gains argument would be tough to win, and "if the government wants to challenge them, the minute they litigate the issue, their names become known." To shield their privacy, he suspects, "They are going to pay the ordinary income tax and be happy with it."

To calculate this tax, the couple will have to place a value on each coin. This value becomes the couple's cost basis in each coin. When they sell each coin, the difference between the sales price and the cost basis will be treated as a capital gain or loss. If they hold the coins for at least a year, it will be treated as a long-term capital gain or loss.

Tiburon coin dealer Don Kagin, who has been tapped to sell the collection for the couple, told The Chronicle that about 90 percent will be sold on Amazon.com's Collectibles site, probably in May. The couple plan to keep a few coins. The rest will be sold privatively to collectors.

Selling for tax money

Martinez notes that if the couple unload the coins in a fire sale - to raise money to pay taxes before the April 15 deadline - it could depress the price.

Dellinger said that if the couple sell the coins one by one over a period of time, the IRS could assert that "they are holding those coins as inventory," and treat any profit as business income, rather than a capital gain.

"If you own 50 acres of real estate and you sell 50 acres in one sale, it's a capital gain. If you subdivide it, and sell 10 parcels, you are considered as holding inventory as a developer," he says.

Martinez considers that unlikely. "I think it's hard to call them dealers," he says. "They are like any other people who find property, and whether they sell it slowly or fast," it will be considered a capital gain.