by Aaron Krowne
Many people are, these days, becoming aware that there is a problem with the dollar. As well documented on this site in the past few years, our economy (both domestic and global) has been hit by wave after wave of financial crisis, panic, market declines (even in supposedly bullet-proof areas, like housing), recession or even depression (as the most people responded in a recent Gallup poll).
Through all this turmoil, gold and silver have been rising steadily since about the year 2000. Though the pundits perenially call this rise “temporary”, or even a “bubble” (like toddlers who have just heard the word accurately applied to the housing market, and are now using it everywhere regardless of relevance), many are beginning to recognize that it is something more. It goes beyond even the description “secular bull market”; the investing public is now starting to realize that the precious metals are simply the leading edge of the trend of hard assets “pricing in” the decline of the dollar.
After all, what all these roving market crises and bailouts really mean is that the dollar is carrying an exponentially heavier burden to hold our economy together. To make matters worse, revelations of systemic mortgage and securities fraud in the past few years just refuse to go away, and naturally imply that the entire fiat dollar-based financial economy is even more of a house of cards than the glossy story of “overzealous” bets on housing would indicate.
This all bodes ill for people exposed to the dollar — especially Americans for whom it is their “home” currency, in which they hold their savings, earn their wages, and do business every day.
So what are we to do?
Thank You Uncle Sam!
Well, some who are ahead of the curve have been buying gold and silver and using them to store their savings. And that’s good. But even more can be done.
In a strange and fortuitous twist, the same US government that forces us all to use fiat (backed-by-nothing) dollars under the threat of legal tender, also sells gold and silver bullion coins that carry a legal tender status. Of course, the US Mint does this primarily to raise money and be as self-funding as possible (especially critical because they have been losing money on minting pennies and nickels in recent years, thanks to the inflation emanating from the Federal Reserve) — not to provide “current money” to be used widely in circulation.
Yet, the legal tender status of these bullion coins is every bit as real as that for the greenback in your wallet. In other words, the government itself must recognize these coins as having a legal status on par with Federal Reserve Notes (FRNs). The catch is that the legal tender “face value” of these coins is so low compared to the prevailing metals price, that you would never want to pay a fiat dollar debt in terms of these bullion coins (called US gold/silver Eagles). The 1-oz coins carry face values of $50 and $1 for gold and silver respectively, yet will cost you about $1700 and $50 (respectively) in FRNs on the open market.
While this may seem a bizarre disconnect (and in many ways, it is), remember the government still keeps its own gold on its books at $42/oz. This, and the apparently “low” face values of the US Eagle coins are all part of the government’s front of asserting that gold and silver are “barbarous relics” and that the unbacked Federal Reserve Note Dollar are what you want to store value and use in commerce. And if that’s their story, they’ve got to stick to it — and we’ll show you how to oblige them.
Here’s where it gets interesting. This is still a (nominally) free country, and as such, you can charge whatever you want for goods and services you are marketing. And you can even arrange payment in whatever you want — you can even barter. And if you use gold and silver US coins, you can do so at the legal tender face value.
So how about some examples. Small restaurateur? How about a $1 in silver eagle for a nice dinner for two instead of $50 FRNs. Dentist? How about a $50 gold eagle instead of nearly $2000 FRN for a root canal. Freelance computer graphician? How about $4 in silver eagles for a 1-day job instead of ~$200 FRNs. Etc.
The point is, you are completely free to determine both the price of your goods/services as well as the value to you of what is received in exchange for the transaction. As long as you and the buyer agree, who is to say otherwise?
In fact, all the government can say about it is that the “sale” occurred at $1, $50, and $4 respectively (instead of the conventional $50, $2000, or $200 in FRNs).
What’s the point of doing this? Well, aside from using it as a convenient way to acquire gold and silver (rather than accepting FRNs, than having to buy the coins, and pay additional taxes and transaction fees), and as a way to assure your cash flow will be sitting in a form that inherently cannot lose its value to inflation, and as a way to encourage your own build-up of gold/silver savings, and as a way to encourage others to hold/use gold and silver, there is a big reason: the preferential tax treatment.
Obviously, if your transaction happens at $1 (silver) vs. $50 (FRNs), if you book it at the $1 legal tender value, you effectively have a 50:1 tax savings. The ratio is similar for transactions with gold Eagles. Note that this applies to both sales tax and income tax!
Is there a Catch?
Yes and no.
The big “catch” is that, once you elect for tax treatment under the legal tender face value of the coins, you cannot simultaneously represent the coins as having a greater value in FRNs (say, based on the “prevailing market value” of the whole coin or metals content).
You also become liable for capital gains taxes once you sell or exchange the same gold/silver coins you booked at face value for any higher dollar value.
In practical terms, what this means is that if you receive (say) one gold Eagle for goods/services provided at $50, then later sell it for $2000 in FRNs, you now owe capital gains taxes on $1950.
Ok, fair enough. At first blush, this isn’t necessarily even a big drawback: any money you receive as legal tender bullion coins and then hold for savings presumably will be sold much later or not at all, allowing for tax deferral (perhaps indefinitely). And that’s still a big advantage.
But it gets even better (and this is where the real magic happens): after receiving them, you can exchange gold and silver coins with like-minded individuals and businesspersons and preserve the tax-deferral through another exchange. This is particularly useful if you want (or need) to unload some gold and silver that you previously received in a transaction booked at face value, but don’t want to become exposed to capital gains.
At that point, you no longer have to worry about the tax deferral– it is someone else’s problem to handle any eventual capital gains on those coins. And if they similarly use the coins in transaction with someone else who is like-minded, they get the same benefit, and the tax deferral is stretched onward.
This sets the stage for a big beneficial societal transformation, as far as sound money is concerned: the gold and silver will start to circulate in a “parallel economy” of sound money advocates. And this circulation will have very little crossover to the fiat dollar economy — and its tax system. Not only will the use of gold and silver be encouraged, and its users protected from FRN dollar inflation, but the government will have the privilege of collecting taxes on a smaller and smaller portion of the economy — indefinintely.
When one remembers that the income tax system was set up at the same time the Federal Reserve was created (presumably to pay perpetual interest on the debt created “backing” every Federal Reserve Note), this is a very gratifying realization.
The Benefits (In Concise Form)
So in sum, the advantages to using gold and silver legal tender coins in commerce are:
- Encourage wider use of gold and silver, and hence more buying (which helps put the dollar in its place as a so-called “currency”)
- Receive gold and silver coins in the course of business rather than having to go buy them (at additional expense)
- Encourage more gold and silver to be held as savings over the fiat dollar
- Help capitalize small businesses & sound money advocates (the true patriots) by bringing them business
- Tax deferred treatment on a personal basis (indefinitely if coins are held, or similarly used for commerce at legal tender value)
- Create a growing sector of a non-fiat dollar, sound money economy, which is largely exempt from taxes
- Deprive big banks and Wall Street (in bed with the Federal Reserve) of dollar funds
But What About What The Government Did To [Some Guy]??
Doubtless many people have “heard” that “some guy” got prosecuted and arrested/fined for making use of gold and silver coins for commerce and/or tax purposes.
But all the major cases I know have some critical wrinkle that differentiates them from the lawful use outlined in this article.
For example, Bernard von NotHaus, maker of the Liberty Dollar, was convicted in 2011 of, essentially, counterfeiting (“passing off other coinage as current money of the United States”). That seems silly to me, as he called it the “Liberty Dollar” specifically to differentiate it from the US dollar, but apparently the government felt the common term “dollar” was enough to peg its case on (the conviction is pending appeal). Even assuming this conviction is legitimate, it doesn’t apply to our scenario, because we’re using the government’s own legal tender coins. End of debate.
Many people are also concerned about the Kahre case. In 2009 Kahre (a developer in Las Vegas) was convicted of tax evasion. His use of gold and silver coins is more similar to what we outline here — he paid employees in gold/silver US coins at the legal tender face value. OK so far. In fact, he won his case at the initial district level — no one could fault him for using the legal tender face value of the coins to book his commerce. But the government was determined to find a way to get their man, and came back with a federal prosecution on a different legal basis. The new case was based on the fact that Kahre’s wife had used gold and silver, which had been booked based on face value, at the much higher FRN dollar market value for the purposes of getting a loan. Once the prosecution realized this, they could then successfully argue that the Kahres had cheated them out of their capital gains taxes which should be owed on the higher asset value.
But we have adequately discussed in this article how this pitfall doesn’t apply if one follows the law to its full and complete extent. Simply don’t engage in any double-dealing and try to represent gold/silver booked at face value at any other value. This doesn’t mean you can’t use the “spot price” (as questionable as it is) or market price of coins to set a basis for how many coins to charge for some good or service. That is your own business — and these “prevailing market prices” have nothing to do with tax exposure. At the end of the day, tax exposure is based on the dollar price of intake and dollar price of sale or tender, and nothing else.
“I Still Don’t Believe Its Legal”
I hope I adequately pointed out above that there is no “free lunch” in the use of gold and silver legal tender coins in commerce. Technically, what you are getting is a tax deferral (though depending on how you hold/save the coins, it could be indefinite), so it is not tax evasion. Plus, the system has stiff built-in “penalties” if you try to switch back and forth between FRN and bullion face value treatments. For example, that dentist receiving the $50 gold coin for the root canal cannot later claim his profit margin was “only 10%” (or similar), so he should only owe taxes on about $200 and not a $1950 capital gain.
However, should you wait many years before selling (into FRN dollars or assets denominated in FRNs), as you should, it is likely you will come out ahead, even factoring in capital gains taxes.
But hey, if all of the above doesn’t convince you, there’s still nothing stopping you from buying gold and silver (in any form) to use as a store of savings and holding it conventionally as an “investment asset”.
I hope this article has illustrated how the use of gold and silver US eagle coins can be advantageous for savings, commerce, and virtuous educational and monetary purposes, within the confines of the current tax code and monetary law.
Now get out there, and get rid of those Federal Reserve Notes!