NEW YORK (
TheStreet) -- Paperwork could destroy part of the gold market.
A provision hidden in the health care law could squeeze small gold dealers, complicate gold sales and give birth to a secret gold market.
The gem is buried in the Patient Protection and Affordable Care Act, Section 9006, page 737, which expands income reporting requirements. The law forces small businesses to fill out a Form 1099 not only for services rendered but for goods purchased which exceed $600 a year, and then file the form with the Internal Revenue Service.
Gold Law Will Kill Gold Dealers
"That affects all business large and small," says Diane Piret, Industry Affairs Director at Industry Council for Tangible Assets. But Piret thinks it could spell disaster for coin and jewelry dealers.
Gold dealers frequently buy scrap gold and coins from the general public easily exceeding $600 per transaction and now will be forced to file additional paperwork.
Toly Popilevsky, the compliance officer for Empire Gold Buyers, a gold dealer in New York City's Diamond District, estimates he will have to fill out an additional 10,000 to 30,000 forms every year. He expects to have to pay his accountant substantially more and will probably need to hire one or two more people to complete the paper work.
"I mean we're still a small company," Popilevsky says. "So any difference $20,000 there, $30,000 here, a couple more employees that
adds up to a couple hundred thousand a year. I mean that's huge."
Piret notes that it's not only additional man power and paperwork that will weigh on Poplievsky and dealers like him, but they will also have to physically mail a 1099 to every client in addition to filing it with the IRS. At 44 cents for postage, not counting the cost of paper, this could cost another $4,400 to $13,200 a year.
Worst case scenario, Poplievsky says he stays in business but sees a big drop in profits. He estimates he is already dealing with a 3% profit margin in a competitive industry.
Other dealers might not be as lucky.
Piret says she has talked to coin dealers who have said "if this
provision goes through I'm done fighting." They will choose retirement instead.
Larger gold dealers like Goldline International will feel a money crunch but should be able to handle the spending costs better than small dealers.
"We have the capabilities," says Mark Albarian, President and CEO of Goldline International. "It will reduce our profitability and it will cause additional expenses" but it will put the smaller dealers "out of business."
The law will also affect gold consumers and could alter their selling patterns.
Poplievsky says his clients are ordinary people who want to trade in a few gold class rings and chains for cash to pay their monthly bills. Under the new rule, the sellers are responsible for the burden of proof. To avoid being taxed on their gold sale as income they need to show how much they originally paid for the item.
For example, if a customer bought a class ring 17 years ago for $1,200, accounting for a hefty retail mark-up, Poplievsky says it would now be worth $600. Under the new provision, that $600 will be taxed as income, at a higher rate, unless the seller can prove the original price paid in order to record the net loss.
"Now I don't have receipts from 17 years ago," says Poplievsky. "So that's $600 that will be pure income to a family that's already starving. So on that $600 they might have to pay $300 in taxes, which they're not really supposed to because they bought it for $1,200."
The landscape gets even trickier if someone sells gold that was given to them as a gift, which they most certainly won't have a receipt for. Whereas the sale might have gone unnoticed by the government before, now the Internal Revenue Service will be able to monitor individuals and all their transactions.
Piret says when you fill out a 1099 form on services there "is no cost basis ... Time is an investment and there might be transportation cost ...
but basically it's all income." When you start talking about a sale of merchandise, there is a "cost of product."
The general consensus is that this problem won't scare off gold sellers but it might change the way they sell. Instead of selling a pile of gold jewelry or gold coins to one dealer they might spread the sales around to a variety of dealers to avoid a 1099. Conversely a gold dealer might offer less than what an item is worth to mitigate the hassle and paperwork.
Scrap gold selling is one of the most liquid parts of the gold market. It's how people can trade in gold for cash and keep gold's value as a form of money that retains strong purchasing power. Any crimp in trading could have a long term affect on
If investors grow reluctant to sell their gold and hoard it instead, it could actually curtail the supply of gold in circulation, which would boost prices. But it could also motivate investors to avoid physical gold altogether to sidestep government regulations and look for other ways to preserve their wealth, which would limit demand and hurt prices.
Jon Nadler, senior analyst at Kitco.com believes dealers and sellers looking to avoid government regulation could create a secret gold market.
The Secret Gold Market
"It could certainly create a parallel pricing universe where individuals via the Internet or by some other means start bidding or offering specific bullion items at prices that are not very much tied to the spot price or current normal premia," says Nadler.
There are currently two amendment bills in the House and Senate calling for the repeal of Section 9006. The problem is, says Piret, is that section 9006 has been "scored" at $17 billion over 10 years. Piret says she has "not found substantiation for this estimate" but that trying to find another way for the government to make $17 billion in revenue by 2020 is a tough order.
Section 9006 won't go into effect until 2012 and so its impact isn't filtering through the gold market yet, but the eventual repercussions if the provision sticks could dramatically change the landscape of the physical gold market.
Written by Alix Steel in New York
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.