Statement of the Industry Council for Tangible Assets, Inc. (ICTA), Severna Park, Maryland

While coin investing is certainly not unique to the United States, the market for rare US coins is the most highly developed coin market in the world.  From 1795–1933 the US produced precious metals coinage for use in commerce.  Twice during the US’ two-hundred-year history, precious metals coins were recalled and melted by the government.  These meltdowns helped transform US coinage from common monetary units into numismatic investments.

It is generally accepted that upwards of 95% of original mintages were lost due to mishandling or melting.  The small surviving population of coins forms the backbone of the investment market for rare US coins. 

Prior to 1981, all rare coins were qualified investments for individually-directed retirement accounts.  In fact, rare coins remain as qualified investments today in certain corporate pension plans.  The Economic Recovery Tax Act of 1981 eliminated the eligibility of rare coins for IRAs by adding Section 408(m) to the USC.  Section 408(m) created an arbitrary category of “collectibles” which suddenly were no longer eligible investments.  Regrettably, in 1981, the precious metals/rare coin industry had no trade association to voice objections, so this provision was enacted without opposition or benefit of comment. 

The Industry Council for Tangible Assets, Inc. (ICTA) was formed in 1983 as a direct result of the 1981 legislation.  Had ICTA existed in 1981, we believe that the organization could have easily demonstrated how the inclusion of precious metals as collectibles was clearly a mistake.  For example, in his testimony before the Senate Finance Subcommittee on Savings, Pensions and Investment Policy, the then Assistant Secretary of the Treasury for Tax Policy, John E. Chapoton, lumped gold and silver into a collectibles category of “luxury items” that also included jewelry.  Clearly, for centuries the US federal government has disagreed with this characterization insofar as it is precisely those products that are stored in the government’s Fort Knox facility.   Indeed finally, in the Taxpayer Relief Act of 1997, we did prevail and were successful in having precious metals (gold, silver, platinum, and palladium bars and coins) restored as qualified IRA investments.

It is interesting to note that Mr. Chapoton concedes the investment value of collectibles.  However, once again, Mr. Chapoton applied certain collectibles criteria to rare coins and precious metals that were not appropriate.  In fact, he often cited examples of the uses of jewelry and silverware as though they applied to rare coins and precious metals.  (His arguments were similar to stating that, while cotton may be an essential ingredient in the manufacture of clothing fabric, disposable cotton balls, and currency banknotes, that does not mean that banknotes are the same as cotton balls.)   The testimony relating to the consumption aspect (for example, a painting or antique rug may be enjoyed for its original intended function in addition to its investment potential) is especially irrelevant, since a coin’s original function is to be spent—clearly not something the owner of a rare $20 gold coin now worth $500 would do.  A bill pending in the US Congress, S.1405, would correct this situation and restore certain coins as qualified IRA investments.

Expanded Safeguards

Beginning in 1986, the market in rare coins became even more viable for investors  with the creation of nationally-recognized, independent certification/grading services.  These companies do not buy or sell rare coin products.  They are independent third party service companies whose sole function is to certify authenticity, determine grade, and then encapsulate each rare coin item.  Each coin is sonically sealed in a hard plastic holder with the appropriate certification and bar coding information sealed within, which creates a unique, trackable item.  This encapsulation serves also to preserve the coin in the same condition as when it was certified.

These companies employ staffs of full-time professional graders (numismatists) who examine each coin for authenticity and grade them according to established standards.  Certified coins (as the resulting product is known) are backed by a strong guarantee from the service, which provides for economic remuneration in the event of a value-affecting error. 

Unlike most other tangible assets, certified coins have high liquidity that is provided via two independent electronic trading networks—the Certified Coin Exchange (CCE) and Certified CoinNet.  These networks are independent of each other and have no financial interest in the rare coin market beyond the service they provide.  They are solely trading/information services. 

 Encapsulated coins now enjoy a sight-unseen market via these exchanges.  These electronic trading networks function very much the same as NASDAQ with a series of published “bid” and “ask” prices and last trades.  The two networks offer virtually immediate, on-line access to the live coin exchanges.  The buys and sells are enforceable prices that must be honored as posted until updated.  Submission to binding arbitration, although rarely necessary, is a condition of exchange membership.  Just as investors in financial paper assets access the marketplace via their stockbroker, investors in rare coins access the on-line market via their member coin dealer(s).  Trades are entered on these electronic networks in the same manner as trades are entered on NASDAQ, with confirmation provided by the trading exchange.  These transactions are binding upon the parties.

Why Rare Coins Provide Needed Diversity in Investment Portfolios

Most brokerage firms and investment advisors recommend that persons saving for retirement diversify their investment portfolios to include some percentage of tangible assets that are negatively correlated to financial (paper) assets.  Tangible assets tend to increase in value when stocks, bonds and other financial assets are experiencing a downward or uncertain trend.  It is important that investors have both tangible asset options—precious metals and rare coins, just as they have the option of stocks and/or bonds. 

The value of precious metals products fluctuates in direct proportion to the changes in price for each metal (gold, silver, platinum and palladium) on the commodity exchanges.  The rare coin market is often related to the precious metals markets; however, rare coins have the added factor of scarcity, which adds to the stability of the market.  For instance, a US $20 gold coin contains .9675 troy ounces of gold (almost a full ounce.)  While the bullion-traded gold one-ounce American Eagle coin’s price will fluctuate daily in accordance with the spot gold price, the US $20 will resist downward pricing since its value is in both its precious metals (intrinsic) content and its scarcity factor.  To illustrate, today, with the gold spot price at $292, a one-ounce gold American Eagle bullion coin ($50 face value) retails for $303.50.  The minimum investment grade US $20 face value gold coin (.9675 ounces of gold) retails for $424.  The American Eagle gold coin has a higher face value and a slightly higher gold content, yet the value of the US $20 rare coin is $120 greater.  While even “blue chip” stocks can become worthless (Eastern Airlines, for example), precious metals and rare coins can never be worth less than the higher of their intrinsic or legal tender face values. 

What’s Wrong With the Current Law

An independent study* prepared for the Joint Committee on Taxation found that the inclusion of rare coins and precious metals in a diversified portfolio of stocks and bonds increased the portfolio’s overall return while reducing the overall risk of that portfolio.  In fact, rare coins remain a qualified investment product for corporate pension plans.  The average American investor should not be penalized for not having that particular tax-advantaged program available to him/her, and it would be only equitable to permit such investment options for those individually-directed retirement accounts.  Removing current restrictions would allow small investors, whose total investment program (or most of it) consists of their IRAs or other self-directed accounts, to select from the same investment options currently available to more affluent citizens.

In addition, the current law creates the inequitable result that occurs when an individual leaves one job and its related pension and profit-sharing plan.  When employees leave or are terminated, they are usually excluded from the employer’s pension and profit-sharing plan.  There is currently no provision for a conduit IRA that allows them to transfer any rare coins that may be part of this plan.  The result is that the item must be liquidated—regardless of whether such liquidation is to the employee’s benefit or detriment at that time.  The only alternative—accepting the distribution in its rare coin form—renders this a taxable event.  This is obviously an inequitable and unintended result. 

Benefits of S. 1405

S.1405 simply restores rare coins to the menu of options for investors and allows them to diversify and stabilize their retirement portfolios.  It would also allow these products to be rolled over from one plan to the employee’s conduit IRA or new plan. 

Important Provisions of S.1405

• Investment coins purchased for individually-directed retirement accounts must be in the possession of a qualified, third-party trustee (as defined by the IRS), not the investor.
• Coins eligible for inclusion in an individually-directed retirement account must be certified by a recognized third-party grading service, i.e., graded and encapsulated in a sealed plastic case.  Each coin, therefore, has a unique identification number, grade, description, and bar code.
• Only those coins that trade on recognized national electronic exchanges or that are listed by a recognized wholesale reporting service are eligible for inclusion.

Recent Action Taken by the US Congress and the States

The Taxpayer Relief Act of 1997 restored certain precious metals bullion as qualified investments for IRAs.  This was the first step in a two-step process.  The restoration of certain certified coins will complete the restoration of these important products as acceptable for individually-directed retirement accounts.

The Joint Committee on Taxation has concluded that the inclusion of rare coins would have negligible economic impact on federal revenues.

There is broad, bipartisan support for the inclusion of rare coins as qualified investments in individually-directed retirement accounts, led by Senator John Breaux.

The independent study* done for the Joint Committee on found that the inclusion of rare coins and bullion in a diversified portfolio of stocks and bonds increased the portfolio’s overall return at the same time that it reduced risk.  By purchasing rare coins in their IRAs, investors are able to keep tangible assets in their retirement plans over the long-term and, when they increase in value, sell them for a profit and reinvest the proceeds without having to immediately pay taxes on the gain.

Some of the conclusions of the study done for the Joint Committee on Taxation appear to have relevance to current economic conditions.  The study reported that stocks and rare coins had the highest rates of return over a 20-year period and the statistical analyses reveal that rare coins are inversely related to stocks in a stock bear market (e.g., the collapse in stocks in 1987 triggered a major bull market in rare coins) but also, on occasion, are positively related to stocks during stock bull markets (e.g., the recovery in stocks after the ‘87 crash did nothing to slow the bull market in rare coins).  For the majority of the period analyzed, the study showed that rare coins did best when bear markets in stocks sent investors looking for alternative investments.

Twenty-six states have exempted coins and precious metals from sales taxbecause they recognize them to be investment products.  In seven additional states, such exemption legislation is under consideration.

We believe that this legislation is consistent with Congress’ desire to encourage U.S. citizens to save/invest more and to take personal responsibility for retirement.  In addition, tangible assets are real, not paper, investments that will never lose their intrinsic value and which maintain an orderly, easily-transacted, and portable marketplace.  They provide today’s investors with security for the future just as they have for thousands of years.

* An Economic Analysis of Allowing Legal Tender Coinage and Precious Metals as Qualified Investments in Individually-Directed Retirement Accounts by Raymond E. Lombra, Professor Economics, Pennsylvania State University, February, 1995; updated April, 2001.  Available from ICTA, PO Box 1365, Severna Park, MD  21146-8365; telephone 410-626-7005; e-mail ictaonline.org