Silver and gold are both popular hedges against the instability of the dollar, though silver has a much lower price point per ounce than gold. This makes silver a compelling precious metals alternative with many of the same market characteristics as gold but much more accessible to the individual investor. Be sure you understand how silver bars are taxed, however. You may get better after-tax results with some alternatives rather than actual physical silver bars.
Capital Gains Tax
The IRS normally assesses capital gains tax on the profitable sale of investment assets. As of July 2012, capital gains on property held for less than one year are taxed at ordinary income tax rates. Assets held longer are taxed at a maximum rate of 15 percent. That maximum tax rate will increase to 20 percent in 2013, unless Congress amends the law. However, actual silver bars, bullion and jewelry typically do not qualify for this tax treatment.
Silver bullion, bars and coins are normally taxed as collectibles, rather than capital gains. This pushes all profitable sales to a tax rate of 28 percent, which is much higher than the rate on long-term capital gains.
A Tax Trap
You may think that you can avoid the 28 percent tax by holding the silver indirectly by buying shares in an exchange-traded fund that holds a silver portfolio. However, this generally does not work since the IRS still considers these assets as collectibles, even when held by an ETF rather than an individual investor.
You can avoid the collectibles tax by owning silver within an IRA, using a "self-directed IRA." If you own the silver in a traditional IRA, you will eventually pay income tax on any distributions you take from the IRA, but you can buy or sell as much silver as you like without tax consequences provided the money remains in the IRA. If you use a Roth IRA, growth is income tax free, provided the assets have been in the Roth for at least five years. Note: You cannot take direct possession of the silver bars if you own them in a self-directed IRA; you must use a custodian to hold the assets for you.
- p silver image by Sergio Hayashi from Fotolia.com