Adding precious metals, particularly silver, to your investment portfolio allows you to introduce a tangible asset to a mix of bonds, stocks and mutual funds, helping you to diversify your portfolio. Precious metals have historically had a low correlation to traditional investments and have served as a hedge against inflation. Between 1971 and 1981, when the US dollar lost more than half of its value, silver prices rose almost five times, during which time silver reached an all-time high in 1980.
There are many ways to invest in silver, such as buying silver bars and rounds, but buying silver coins is the most popular form of investing in silver. Among the many potential options are 90% U.S. silver coins minted in 1964 and earlier (commonly referred to as junk silver coins); silver bullion coins, which have a silver fineness of .999 or more; and collectible or rare coins, which are less subject to fluctuations in the price of silver. Additional silver coin options can be found here.
Should You Buy Junk Silver, Bullion or Rare Silver Coins?
Choosing between junk silver, bullion, rare silver coins or a combination of two or more is one of the most important decisions you’ll make.
If you’re looking to invest in silver primarily as a hedge against inflation, you may want to invest in junk silver or bullion coins, as collector and rare coins have numismatic value. This means that the value of the coins is primarily based on the collectability of the coins and current demand in the marketplace, as opposed to the silver value. 90% silver coins and numismatic silver coins are typically purchased through coin collectors, private sellers or coin dealers, while bullion silver coins can be purchased directly from the Mint or any of the previously mentioned outlets.
If you want to convert an IRA into silver, bullion silver coins, such as American silver eagles, are an excellent choice.
Ultimately, the best silver coin for investment purposes depends on many factors, including premiums, your estimated holding period, and where and how you will store the silver.
Investing in numismatic or rare coins is often seen as a strategy for collectors and speculators, as there are some potential pitfalls to buying rare silver coins:
- Coin dealer premiums on collectible silver coins are much higher than for bullion coins
- There are no tax advantages to buying rare silver coins, as all precious metals (including bullion) are viewed as “collectibles” by the IRS
- You may encounter issues selling your collectible silver coins, as there may be a limited number of buyers available for your particular coin(s)
- When you buy and sell 90% silver coins or silver bullion, the market value is easier to establish, as the value is primarily based on the current spot price of silver in the commodities market.
This isn’t to say that investing in rare silver coins isn’t the best strategy for you. However, it’s best to first consider your main goals and decide if you’re purchasing silver coins primarily for their rarity and historical significance, or if your primary objective is to purchase silver coins as a hedge against inflation, currency depreciation and economic crises. Investing in numismatic coins can be a bit riskier, but there’s also greater potential upside potential if you purchase numismatic coins at the right time and at the right price.
Safely Buying Silver Coins
There are many ways to buy silver coins, including buying coins online, at coin shops, through estate sales and from coin dealers. If you’re investing in bullion, you can purchase many types of silver bullion coins directly through the United States Mint or the Royal Canadian Mint. The two most popular and recognized one ounce silver coins are the U.S. Silver Eagle and the Canadian Silver Maple Leaf.
If you opt for buying junk silver, the most popular way is buying a $1,000 in face value bag, which is equivalent to approximately 715 ounces of pure silver. An advantage of buying junk silver coins over government-minted bullion coins is that you’ll generally pay a smaller premium per ounce. This means that buying junk silver coins is the cheapest way to buy high-quality government issued silver coins.
If you prefer, it’s also possible to buy junk silver in smaller increments, such as a tube of coins. Keep in mind that $1.50 consisting of dimes, quarters and half dollars is about an ounce of silver. This will help you determine how much you are paying per ounce. The most popular junk coins are half dollars, followed by quarters and dimes.
Regardless of where you buy silver coins, make sure that you do your research. Check with the Better Business Bureau, read trusted forums and make sure you know who you are dealing with. Check coin prices with premiums or commissions included to make sure you’re receiving a fair price.
Tax Ramifications of Investing in Silver Coins
Finally, it pays to understand a bit about tax ramifications before you invest in silver. Gold, silver and other precious metals (along with stamps, antiques and more) are considered “collectibles” by the IRS. When you sell a collectibles investment you’ve held for over a year, gains are taxed at a higher rate than that applied to mutual funds, stocks or bonds. If you hold your investment for a year or less, the gain is short-term capital gain and taxed at a normal income rate.
To determine your tax consequences of selling silver coins, you’ll need to first figure out your profit or loss. This includes calculating the cost basis, which includes your purchase price, dealer fees, storage fees and any other miscellaneous expenses that you may have incurred. You will also need to determine how long you have owned the silver.
A special note: If you use an IRA or tax-deferred account to invest in silver bullion, there are usually no tax consequences for selling silver coins because funds are exempt from taxation until the money is withdrawn. The IRS only allows American Eagle silver coins and other high-quality silver bullion coins, however, and if you don’t follow IRS rules, it may be considered an early distribution and you’ll pay ordinary tax plus a 10% penalty.