Silver swap sounds good but tax hits

September 20, 2018
Pat Heller

In recent weeks, the silver/gold ratio has at times exceeded 85:1. That means one ounce of gold is worth 85 ounces of silver, or that the current gold price is more than 85 times that of the silver price. Analysts and investors track this ratio to help determine whether gold or silver reflects the better current value.

When the U.S. issued gold and silver coins for circulation, the silver/gold ratio was pretty much maintained at 16:1. Over the past 50 years, the ratio has almost always been higher. It peaked at about 100:1 and has rarely been below 25:1.
When the silver/gold ratio topped 85:1 recently, that was the highest the ratio had been since the early 1990s. On that basis, silver now looks to be the better asset to acquire.
Although gold and silver prices tend to move up or down together, silver tends to move by a greater percentage than gold. The silver market is much smaller in dollar terms, so any shift in supply or demand factors has a greater impact on the silver than the gold price.

So, when prices are rising, the silver/gold/silver ratio tends to decline as silver’s price rises faster than gold. When prices are dropping, the ratio almost always increases as silver’s price falls by a greater degree.
For instance, at the beginning of 2000, the gold/silver ratio was about 54:1. When silver closed near an all-time high of about $50 at the end of April 2011, the ratio had fallen to 40:1. Since the end of April 2011, the price of silver is down more than 70 percent while gold had come down less than 25 percent.

From now into the future, I expect that silver’s price will outperform that of gold. Even considering the transaction cost, I think it is prudent to consider swapping existing bullion-priced physical gold into silver. The reasoning behind that is that one’s holdings after such a swap are likely to be of greater value than not doing the swap.
However, there are at least two caveats to consider before going ahead with such a swap. First, the nature of such a swap would mean that the silver you receive would have a slightly lower liquidation value than the gold you give up. That is how the dealer would make their margin. But if you would need to sell your precious metals in the near future, such a swap would result in you receiving less money.

Second, any such a swap is treated by the Internal Revenue Service as a sale that is to be reported on your income tax forms. If you have a low cost basis in the gold you swap, you may have to pay some income taxes for the current tax year. Thus, the price of silver would have to appreciate that much higher to cover both the transaction costs and the income tax liability.
On the other side, if your cost basis in your gold is higher than current value, you could show a loss for your current year income taxes, where you would save taxes. You should consult your tax professional for more information on the impact of any possible gold and silver swap.

Further note: In years past, it was possible to engage in some “like-kind” tax-deferred swaps of gold and silver that would not result in immediate reporting and paying of income taxes. While the IRS modified the definition of what qualified or did not qualify for such swaps, one consistent requirement was that it had to be products of the exact same metal to qualify. With the new tax law, it is no longer possible to defer the reporting and paying of income taxes on any swaps of precious metals, even if for the very same metal.

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