Finding buried treasure might sound like a childhood dream. But for one California couple, that dream came true last year when they made a surprising find in their backyard. Still, as fantastic as the situation sounds, harsh reality is about to set in for these lucky discoverers -- in the form of what could be a huge tax bill.
The story of the as-yet unidentified couple almost defies belief. According to reports, the couple had walked by the place where they eventually found the coins countless times before making the discovery about a year ago. What they found has now been named the Saddle Ridge Hoard, consisting of more than 1,400 gold coins from the 19th century. At current gold prices, the coins would be worth about $2 million melted down. But coin-collecting experts say that because of the rarity of finding coins from the 1840s through the 1890s in such good condition, the true value of the find could be more than $10 million. Through the numismatic expert that they hired to evaluate the coins, the couple has said that after allowing a coin-collecting group to exhibit some of their find, they will sell most of the coins, donating some of their profits to charity and using the rest to help them keep their property.
At first, some speculated that the find might have been property stolen from the San Francisco Mint in 1901. If it had been found to be stolen, then the couple might not have received anything. But authorities from the U.S. Mint have said that they've found no evidence of a link between the discovery and the theft, and the Mint doesn't plan to investigate further at this time.
What the IRS gets
Unfortunately for the California couple, tax authorities will end up being big winners from their find as well. According to federal tax law, when you find lost or abandoned property, you have to pay tax on it as income equal to its value in the first year you take full possession of it. If there had been a court battle disputing the couple's right to the coins, they might have been able to defer paying tax until the dispute had ended. But with the Mint backing down and no other claims as yet having happened, it's likely that the couple will owe tax as early as this April.
As for what tax rate the couple will pay, the size of the find suggests that most of the income will be subject to the top tax rate. According to a report from the San Francisco Chronicle, the couple would have at least an argument that lower capital-gains rates of 28% should apply, which currently applies to gold coins held for investment as well as bullion ETFs SPDR Gold (NYSEMKT:GLD) and iShares Silver (NYSEMKT:SLV). But the desire for anonymity could lead them to avoid the tax litigation that would almost certainly ensue if they claimed the lower rate.
As a result, the couple will likely owe ordinary income tax at 39.6% federally for most of the find, combined with 13.3% California state income tax. The couple will get a partial break because state income tax is allowed as a deduction on your federal tax return, but the net result will be that the couple will get to keep just barely over half of its find, with roughly $4.7 million out of the $10 million going to the U.S. Treasury and the State of California.
Keep the tax man in mind
Buried treasure isn't the only situation in which the IRS wants its fair share. Indeed, in many more common situations involving big winnings, the IRS gets its cut before you even get your hands on the money. For instance, with lottery awards, prizes over $5,000 are subject to federal withholding of 25% of the prize amount, and other states withhold additional amounts based on their prevailing tax rates. Similarly, casinos are required to withhold tax on big wins, with amounts varying depending on the particular game involved. Yet it's important to remember that the amount withheld doesn't necessarily match up with the tax owed, and you could end up owing an additional amount at tax time.
An unexpected discovery or big-money win is always welcome news. Just bear in mind that it's also good news for the IRS, and be sure not to spend its share as well as your own.
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.