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BitGold’s Secret: A Taxation Time Bomb

Commodities / Gold and Silver 2016 Mar 22, 2016 - 12:50 PM GMT

By: Peter_Schiff

Commodities

Gold is not only the world’s best performing asset so far in 2016, but it’s also off to its strongest annual start since 1980. A key difference is that 1980 was the end of a bull market, while this is the beginning of a new one. Actually, it’s the beginning of the second leg of a long-term bull market that began over 15 years ago, which I believe will be even more powerful than the first.

But today, I am warning potential gold buyers about another gold ripoff. 


[Many of you have already downloaded my free special report on gold scams available at www.goldscams.com. If you have not read this report, I strongly suggest that you do so now.]
 
This case comes from a recent Canadian startup called BitGold, operated by GoldMoney Inc. One of the services BitGold provides is prepaid debit cards that customers can use to access gold purchased from and stored by the company. Now that is a great idea. The problem is that BitGold claims to be the first and only company in the world providing this service. The truth is there are several other companies offering gold-backed, prepaid debit cards, including my own company, Euro Pacific Bank, that first began offering them over three years before BitGold copied the concept. In fact, my bank even offers silver-backed prepaid debit cards, a service not currently provided by BitGold.
 
I find it hard to believe BitGold isn’t aware of existing prepaid gold-backed debit cards, but they have no problem marketing theirs as being the first and only one in the world. My guess, however, is their real intention is to deceive investors purchasing the company’s over-priced stock. If investors think the company provides a unique service, they are more likely to overlook huge current losses. The hope is that by being the only company providing an innovative service that those losses will eventually turn into profits. But since BitGold does not have the first-mover advantage it claims and is not the only player in a market that I think will be even more competitive in the future than it is today, I do not believe BitGold’s business model will ever deliver the kind of profits investors expect.
 
However, one difference between BitGold and my bank is that while BitGold accepts American customers, my bank does not. So if you’re an American, and you like my idea of having gold that you can carry around in your wallet and spend using a pre-paid debit card, then BitGold is a viable alternative to my bank. But my concern is for those Americans who may fall victim to another marketing deception being perpetrated by BitGold.
 
BitGold claims that customers can redeem their gold in popular sovereign coins or reputable bars – the same coins and bars you can also buy from my company, SchiffGold. In addition, BitGold claims to be the lowest cost way to purchase these products. The truth is that BitGold is potentially the most costly way to buy these products. As such, if your ultimate goal is to take physical possession of sovereign gold coins or bars, BitGold is the last vendor you should consider buying from.
 
Let me explain why. BitGold’s claim that its customers can redeem their gold in sovereign coins or bars is grossly misleading. If you buy gold from BitGold, you are buying a fractional interest in larger bars that the company stores on behalf of all of its customers. If you want to take actual physical delivery of sovereign coins or smaller bars, legally you are not redeeming anything that you already own. What you have to do is sell your fractional interest in those large bars first, then use the proceeds to purchase sovereign coins or bars from a separate company that BitGold has partnered with. So this process is not a legal redemption of gold that BitGold has been storing for you, but a brand new purchase of gold coins or bars that you never owned, from a completely separate company! This distinction is huge, and BitGold seems to be going out of its way to conceal the implications from its customers.
 
To understand the true cost of buying through BitGold, consider the example of “redeeming” ten, one-ounce Canadian Gold Maple Leafs. Let’s assume the price of gold is $1,300 per ounce when it’s originally purchased, but rises to $2,000 per ounce by the time the customer wants to redeem it. The customer would have been charged a 1% fee of $130 when he first purchased his gold. Then he would pay another 1% fee to sell his gold. But since the price of gold has risen to $2,000, the 1% fee would have also risen to $200. BitGold also adds a “redemption fee” of 0.5 of a gram of gold, which in this case tacks on another $32. BitGold’s partner then charges an additional 2.2% for the purchase of the coins. So the total cost would be $802 over the initial spot price of gold, or 6.2% of the original purchase price (not even including the hefty shipping and insurance fees). By comparison, SchiffGold sells these coins for 3-4% above spot – typically with free shipping. So rather than being the lowest cost way to buy gold coins, BitGold is actually about twice as expensive as most of its competitors.
 
If BitGold were only twice as expensive as its competitors, it would not be that bad. But the ticking time bomb that BitGold is not disclosing is that when customers sell their gold on the BitGold platform to purchase sovereign coins or bars, the sale is a taxable event. This revelation is huge, and will add an enormous tax cost that will dwarf the already hefty markup charged by BitGold for selling you the physical bullion being redeemed.
 
The US government taxes any profits realized on gold sales at 28%, provided that your holding period is greater than a year. If it’s less than a year, the gain is taxed at the ordinary income tax rate that can be as high as 39.6%. On top of that, there is another 3.8% added for the Obamacare tax, bringing the total tax bill to 31.8% for long-term gains and 43.4% for short-term gains. But if you live in one of the 41 states that also imposes an income tax, you are looking at a combined tax rate closer to 40% or 50%, depending on your holding period!  
 
Using the above example, assuming a holding period longer than a year, this tax bombshell adds approximately $280 per ounce to the cost of the purchase, for a total extra cost of $2,800 for 10 Maple Leafs, representing 22% of the original purchase price. So the true cost to buy from BitGold in this example is 28.2% (6.2% paid to Bitgold and its partner, and 22% paid to federal and state tax collectors), as opposed to the 3-4% cost to buy from their competitors, like SchiffGold. Now if you don’t have the extra $2,800 lying around to pay the tax when you “redeem” your coins, you would only be able to redeem 8.6 ounces of physical gold out of the 10 ounces you originally purchased. The other 1.4 ounces would have to be sold to pay your tax bill. Also, since $676 of the $802 charged by BitGold and its partner is not assessed until you buy your coins, if you did not set aside those funds, the total amount of gold you will actually be able to afford to redeem will be fewer than 8.3 ounces.   

Of course, the higher the gold price rises, the bigger your tax bill grows, and the more of your gold will be surrendered to the taxman to pay it. Say you take delivery of your gold when its price has risen to $5,000 per ounce. Your tax bill at 40% on the ten ounces originally purchased when gold was selling at $1,300 per ounce rises to almost $15,000. That exceeds the $13,000 you originally paid for your entire purchase! If you don’t have the cash, you would only be able to redeem 7 ounces of gold out of the 10 you originally purchased. You would then need to sell 30% of your gold just to pay the taxes to redeem the other 70%. Of course, this assumes tax rates have not gone up. In an economy where gold is selling for $5,000 per ounce, and given the growing size of the national debt, my guess is that future income tax rates will be much higher than they are today.

In fact, if there is hyperinflation and tax rates also go up, and you try to “redeem” your gold from BitGold, there will be very little actual gold left to redeem. If the price of gold rises to $100,000 per ounce, and the tax rate also rises to 70% (maybe as a result of some kind of windfall profit tax on “evil gold speculators profiting while others suffer”), your tax bill would be almost $700,000. As such, you would only be able to redeem 3 ounces of gold from your original 10-ounce purchase. You end up paying 70% of your initial gold purchase in taxes, and your $700,000 tax bill is over 50 times higher than your original cost to buy your gold!
 
Now with true hyperinflation, the future price of gold could be much higher than that, and at one point in American history the top income tax rate was 90%. I agree that this is a worst-case scenario, but one of the reasons to buy and hold physical gold is protection against worst-case scenarios. But under a worst-case scenario, having gold stored at BitGold will be virtually identical to having no gold at all. So if you think the price of gold is going up, and you ultimately want physical delivery, buy your gold from SchiffGold and take delivery now. Don’t buy from BitGold expecting to take delivery later, as after taxes there may be very little gold left to deliver.

Peter Schiff is Chairman of SchiffGold, CEO and Chief Global Strategist of Euro Pacific Capital, Inc, and host of The Peter Schiff Show. Peter is an economic forecaster and investment advisor influenced by the free-market Austrian School of economics. He is one of the few forecasters who accurately and publicly predicted the 2007 housing market collapse and subsequent 2008 financial crisis. Peter recommends long-term investment in foreign markets with sound fiscal policies, as well as global commodities including physical precious metals.
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