Sapphire is item, that can be used with trading with Snow Villagers. They are found in Ice Dragon Caves, both as ores and in chests. They can also be found in chests in Ice Dragon Roosts.
Sapphires are crafted with Sapphire Block (Shapeless Recipe).
You can get Sapphires by smelting Sapphire Ore. Bonus: 1.0 XP.