Does the sale of a Nevis LLC interest by a U.S. citizen, where the LLC owns an interest in a foreign trust holding precious metals, qualify for the lower long-term capital gains tax rate rather than the collectibles tax rate?

To determine whether the sale of a Nevis LLC interest by a U.S. citizen, where the LLC owns an interest in a foreign trust holding precious metals, qualifies for the lower long-term capital gains tax rate (generally 0%, 15%, or 20%) or the higher collectibles tax rate (28%), we must analyze the relevant tax rules regarding collectibles, look-through rules, and the treatment of interests in entities holding collectibles.

1. Definition of Collectibles and Taxation of Collectibles Gain

Under the Internal Revenue Code, "collectibles" are specifically defined to include any metal or gem, among other items (such as art, rugs, antiques, stamps, coins, and alcoholic beverages). For individuals, long-term capital gains from the sale of collectibles are taxed at a maximum rate of 28%, rather than the lower rates that apply to most other long-term capital gains.

2. Look-Through Rules for Interests in Entities Holding Collectibles

a. Partnerships, S Corporations, and Trusts

Treasury Regulation § 1.1(h)-1 provides a "look-through" rule for sales or exchanges of interests in partnerships, S corporations, or trusts. When an interest in such an entity is sold, the transferor must recognize collectibles gain to the extent that the gain is attributable to the entity’s underlying collectibles. The amount of collectibles gain is determined as if the entity sold all its collectibles for fair market value immediately before the transfer.

b. Investment Trusts (Including Physically Backed Metal ETFs)

The IRS has clarified that if an entity is treated as an investment trust under Treas. Reg. § 301.7701-4(c), and the trust holds physical metal, then the owners of the trust are treated as owning undivided beneficial interests in the underlying metal. Thus, the sale of an interest in such a trust is treated as a sale of the underlying metal, and any gain is collectibles gain subject to the 28% rate.

3. Application to LLCs and Foreign Trusts

a. LLC Classification

A Nevis LLC, for U.S. tax purposes, is typically treated as a partnership or disregarded entity if it has more than one member or a single member, respectively, unless it elects to be treated as a corporation. If the LLC is treated as a partnership or disregarded entity, the look-through rules for partnerships would apply.

b. Foreign Trust Holding Precious Metals

If the LLC owns an interest in a foreign trust that holds precious metals, and the trust is not a grantor trust (i.e., the U.S. person is not treated as the owner of the trust assets under §§ 671–679), then the look-through rule for non-grantor trusts applies. The gain recognized on the sale of the LLC interest is treated as collectibles gain to the extent it is attributable to the underlying precious metals held by the trust.

If the trust is an investment trust (such as a physically backed metal ETF structured as a trust), the IRS treats the investor as owning a direct interest in the underlying metal, and any gain on the sale of the trust interest (or, by extension, the LLC interest if the LLC is a pass-through entity) is collectibles gain.

4. Summary of Tax Treatment

• If the Nevis LLC is treated as a partnership or disregarded entity for U.S. tax purposes, and it owns an interest in a foreign trust (not a grantor trust) that holds precious metals, the look-through rule applies.
• The portion of the gain on the sale of the LLC interest that is attributable to the underlying precious metals is treated as collectibles gain and taxed at the 28% rate, not the lower long-term capital gains rate.
• If the trust is an investment trust holding physical metal, the investor is treated as owning a direct interest in the metal, and the sale of the LLC interest is treated as a sale of the underlying metal, also subject to the 28% collectibles rate.

5. Exceptions and Caveats

• If the LLC is treated as a corporation for U.S. tax purposes, the look-through rule does not apply, and the sale of the LLC interest would generally be subject to the regular long-term capital gains rates, unless the LLC itself is a dealer in collectibles or otherwise subject to special rules.
• If the trust is a grantor trust and the U.S. person is treated as the owner, the sale of the LLC interest may be treated as a sale of the underlying assets, and the same collectibles gain treatment would apply.
• The look-through rule does not apply to redemptions of partnership, S corporation, or trust interests; it applies to sales or exchanges.

6. Conclusion

The sale of a Nevis LLC interest by a U.S. citizen, where the LLC owns an interest in a foreign trust holding precious metals, will generally be subject to the 28% collectibles capital gains tax rate to the extent the gain is attributable to the underlying precious metals, rather than the lower long-term capital gains rate. This is due to the look-through rules for partnerships and trusts, and the treatment of investment trusts holding physical metals as direct ownership of collectibles.

If you need a more precise answer, such as the effect of a specific entity classification or trust structure, please provide additional details about the U.S. tax classification of the LLC and the nature of the foreign trust.