Summary
If you have a gain when selling physical silver (or any other collectible, or ETF backed by collectibles like SLV), it is taxed exactly as if it was earned income, except that if the gain was long-term the tax rate is limited to 28%.
Information on 28% Capital Gains Tax Rate for Silver and Gold
Most investors in silver and gold find out at some point that when selling, they are taxed as collectibles, at the maximum rate of 28%, and get quite upset! Many even decide not to pay tax when they sell, and risk serious fraud penalties. Worse, investing in ETFs backed by silver is taxed the same as physical.The truth is a bit different. The term "maximum rate of 28%" is used frequently, and it makes it sound like you are being penalized, and that the rate is always 28% (it sounds like they are saying "You have to pay the maximum rate, which is 28%"). That isn't quite the case. The "Maximum" here simply means that the most you will pay on capital gains when selling silver (or gold or other collectibles) is 28%, never higher. It could have been correctly and more accurately phrased as "The maximum the rate can be is 28%" or "The tax rate is limited to a maximum of 28%".
In the United States, all income is always taxed at a specific tiered rate -- unless the law says otherwise. And for collectibles, the law has a somewhat lower rate, which is limited to no more than 28%.
Examples
Let's say that Joe has several options for making money in the tax year in question. He lives rent free and only needs $10,000 to make it through the year. He can either work, or sell some investments. One option is to sell physical silver, another is to sell shares of Apple. In either case, they can be either long term gains (owned more than 1 year) or short term gains (owned less than 1 year). He is single, and has $9,500 in standard deductions and exemptions, using 2011 tax tables.
| Situation | Total Income | Taxable Income | Tax | Eff. Tax Rate | Notes |
|---|---|---|---|---|---|
| He works part time, and earns $10,000 for the year. | $10,000 | $500 | $51 | 0.51% | This is earned income. Little tax due, since his income is just above the standard deduction and exemptions. |
| He sells $10,000 of silver he bought for $6,000 a few years ago. | $4,000 | $0 | $0 | 0% | This is long term collectibles capital gains. No tax due, since his income is less than standard deduction and exemptions. |
| He sells $10,000 of Apple shares he bought for $6,000 a few years ago. | $4,000 | $0 | $0 | 0% | This is long term capital gains. No tax due, since his income is less than standard deduction and exemptions. |
| He sells $10,000 of silver he bought for $6,000 a few months ago. | $4,000 | $0 | $0 | 0% | This is short term collectibles capital gains. No tax due, since his income is less than standard deduction and exemptions. |
| He sells $10,000 of Apple shares he bought for $6,000 a few months ago. | $4,000 | $0 | $0 | 0% | This is short term capital gains. No tax due, since his income is less than standard deduction and exemptions. |
So we can see here that if you do not have much income (regardless of the source), it is possible to pay no taxes, regardless of the source of income.
Here's another example, where he makes more money:
| Situation | Total Income | Taxable Income | Tax | Eff. Tax Rate | Notes |
|---|---|---|---|---|---|
| He works full time, and earns $100,000 for the year. | $100,000 | $90,500 | $18,964 | 18.7% | This is earned income. |
| He sells $100,000 of silver he bought for $60,000 a few years ago. | $40,000 | $30,500 | $4,154 | 13.6% | This is long term collectibles capital gains, which are taxed at regular income rates with a 28% maximum. |
| He sells $100,000 of Apple shares he bought for $60,000 a few years ago. | $40,000 | $30,500 | $0 | 0% | This is long term capital gains. No tax due, since the $30,500 would put him in the 15% tax bracket, and the capital gains rate was 0% at that tax bracket. |
| He sells $100,000 of silver he bought for $60,000 a few months ago. | $40,000 | $30,500 | $4,154 | 13.6% | This is short term capital gains, which are taxed as regular income. |
| He sells $100,000 of Apple shares he bought for $60,000 a few months ago. | $40,000 | $30,500 | $4,154 | 13.6% | This is short term capital gains, which are taxed as regular income. |
Here, we see a more realistic example where selling the silver generates less tax than working (since the original purchase was made with money that had already been taxed). And, for short term gains the rates for selling silver are identical to selling stocks. The long term collectibles gain generates a bigger tax bill than the stocks, but is still only 13.6% (and only 4% of the $100,000 received).
What is the Tax Rate for Selling Silver?
You probably know the first step: you determine the capital gain (essentially, your profit). This is normally the price you received (after any fees, commissions, etc., if you paid any) minus the price you paid (minus fees, commissions, etc., if you paid any). So if you paid $250 for a silver bar and sell it for $300, you have a capital gain of $50.So in this case, you owe tax on $50.
Now, the actual tax you will pay isn't necessarily 28% ($14 in this case) that many people lead you to believe you owe.
The rate you pay is usually the same rate you pay for your income tax, with a maximum of 28%. Let's say you are married, with no dependent children, and earn $70,000 a year. Your first $19,000 or so of income is tax-free, allowing you over $88,000 of income at the 15% tax bracket. So the $50 profit would get taxed at the 15% tax rate, not 28%. Selling the bar for $300 would generate a tax of $7.50.
Who Pays 28%?
The only way that you would actually pay 28% would be if you are in the 28% tax bracket, which for married filing jointly starts at $142,700/year (after deductions, so perhaps $150K-$180K or more), or $85,600 for an individual. So you have to be making a good amount of money to actually pay the 28% rate.
Capital Loss Carryovers, Short Term Losses
From my understanding, if you have a capital loss carryover, and you have a capital gain from collectibles, the carryover will reduce your gain (lower your taxes). Likewise, a short term loss in this year will reduce your collectibles gain.Specifically, the instructions for Schedule D have a "28% Rate Gain Worksheet." In a nutshell, you add all sources of collectibles gains, subtract any capital loss carryovers from previous years and subtract any current year short term loss. That results in the amount you enter on Schedule D Line 18 (for tax year 2017, at least). This then gets entered into the complex Schedule D Tax Worksheet, which presumably isn't going to have you pay tax on more than what the 28% Rate Gain Worksheet came up with. That said, the Schedule D Tax Worksheet is quite complex, so I might be missing something.
Tax Software Tests
I ran some tests in H&R Block 2017. These are based on the tax year 2017, with generic out-of-the-box assumptions (e.g. 2 exemptions since it is a married couple, and the standard deduction rather than itemized).For a married filing jointly return, a couple making $1,000,000 profit on collectibles (no other income, carryovers, etc.) would pay tax of about $304K. That's $265K from the 28% gain rate (it's less than 28% because of $12,700 in standard deductions), plus $10K for AMT, plus $28,500 for Net Investment Income Tax (for people making a lot of money; over $200K/$250K in 2018 depending on filing status). See tax return.
For a married filing jointly return, a couple making $1,000,000 profit on collectibles (no other income), but with a $3,000,000 capital loss carryover from previous years, would pay no tax. A $3K loss would be allowed (from the $3M capital loss carryover), and the $1M gain would reduce the captial loss carryover. See tax return.
For a married filing jointly return, a couple making $1,000,000 profit on collectibles, and having a $50,000 income, with a $3,000,000 capital loss carryover from previous years, would pay $3,001 in tax (all from the $50K income, which gets reduced to $26,200 of taxable income due to itemized deductions, exemptions, and the $3K capital loss that can be used). See tax return.
For a married filing jointly return, a couple making $1,000,000 profit on collectibles, and having a $1,000,000 short-term loss, with no other income/carryovers, etc., the person would not owe any tax. See tax return.
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