In the case of a U.S. citizen selling an interest in a Nevis LLC that owns part of a foreign trust holding precious metals, is the gain subject to the collectibles tax rate or the standard long-term capital gains rate?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
To determine whether the gain from the sale of an interest in a Nevis LLC (which owns part of a foreign trust holding precious metals) by a U.S. citizen is subject to the 28% collectibles capital gains tax rate or the standard long-term capital gains rate (0%, 15%, or 20%), we must analyze the relevant tax rules regarding collectibles, look-through rules for entities, and the character of the asset sold.
1. Definition of Collectibles for Tax Purposes
Under the Internal Revenue Code, a "collectible" includes any metal (such as gold, silver, platinum, or palladium), whether in coin or bullion form, as well as other items like art, rugs, antiques, gems, stamps, coins, and alcoholic beverages. The long-term capital gain from the sale of a collectible is taxed at a maximum rate of 28% rather than the standard long-term capital gains rates.
2. Look-Through Rule for Collectibles Held Through Entities
Section 1(h)(5) of the Internal Revenue Code provides a "look-through" rule for collectibles held through pass-through entities. If a taxpayer sells an interest in a partnership, S corporation, or trust, and the gain is attributable to the sale or exchange of collectibles held by the entity, then the gain is treated as collectibles gain and subject to the 28% rate, to the extent of the taxpayer’s share of the entity’s net collectibles gain.
IRS guidance and technical advice confirm that this look-through rule applies to interests in partnerships, S corporations, and trusts, but not to interests in investment trusts that are treated as grantor trusts under Treas. Reg. § 301.7701-4(c) (such as certain physically backed metal ETFs).
3. Application to LLCs and Foreign Trusts
- LLC Classification: For U.S. tax purposes, a Nevis LLC is generally treated as a partnership if it has more than one member and has not elected to be treated as a corporation. If it is a single-member LLC, it is typically disregarded as an entity separate from its owner, unless it has elected otherwise.
- Ownership of Foreign Trust: If the LLC owns an interest in a foreign trust, and the trust holds precious metals, the character of the gain on the sale of the LLC interest depends on whether the look-through rule applies.
If the LLC is Treated as a Partnership or Disregarded Entity:
- Partnership Interest: If the LLC is treated as a partnership, and the U.S. citizen sells an interest in the LLC, the look-through rule applies. The portion of the gain from the sale of the LLC interest that is attributable to the LLC’s share of collectibles gain (i.e., gain from the precious metals held by the foreign trust) is taxed at the 28% collectibles rate.
- Disregarded Entity: If the LLC is a disregarded entity, the U.S. citizen is treated as directly owning the interest in the foreign trust. If the foreign trust is a grantor trust, the U.S. citizen is treated as directly owning the underlying precious metals. Any gain on the sale of the interest in the precious metals (or the trust interest, if it is treated as a direct ownership of the metals) is subject to the 28% collectibles rate.
If the LLC is Treated as a Corporation:
- If the LLC has elected to be treated as a corporation, the look-through rule for collectibles does not apply. Gain from the sale of stock in a corporation is generally not subject to the collectibles rate, even if the corporation owns collectibles, unless the corporation is a dealer in collectibles or the sale is treated as a redemption or liquidation that is effectively a sale of the underlying assets.
4. Summary of Tax Treatment
- If the Nevis LLC is a partnership or disregarded entity: The gain from the sale of the LLC interest is subject to the 28% collectibles capital gains rate to the extent the gain is attributable to the LLC’s indirect interest in precious metals held by the foreign trust.
- If the Nevis LLC is a corporation: The gain from the sale of the LLC interest is generally subject to the standard long-term capital gains rates (0%, 15%, or 20%), not the 28% collectibles rate.
5. Reporting
- The portion of the gain subject to the 28% collectibles rate should be reported on Form 8949 and Schedule D, with the appropriate code indicating collectibles gain.
6. Caveats and Additional Considerations
- The precise tax treatment may depend on the specific structure of the LLC, the classification of the foreign trust, and the nature of the underlying assets.
- If the LLC or trust is structured as an investment trust under Treas. Reg. § 301.7701-4(c), the investor is treated as owning an undivided interest in the underlying metals, and the sale of the LLC or trust interest is treated as a sale of the metals, subject to the 28% collectibles rate.
- If the LLC is a corporation, the look-through rule does not apply, and the standard capital gains rates apply.
7. Conclusion
For a U.S. citizen selling an interest in a Nevis LLC that is treated as a partnership or disregarded entity for U.S. tax purposes, and where the LLC owns part of a foreign trust holding precious metals, the gain is subject to the 28% collectibles capital gains tax rate to the extent the gain is attributable to the underlying precious metals. If the LLC is treated as a corporation, the standard long-term capital gains rates apply.
If you need a more precise answer, please clarify the U.S. tax classification of the Nevis LLC and the foreign trust.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
