Investing in collectibles can be rewarding and even lead to significant returns, but there are many risks. Even if you avoid these risks, you still have to account for all the taxes, fees and costs. However, if you bought a collectible for $500 ten years ago and it’s now being appraised for $8,000, you’re probably not going to be too upset. But when you finally do sell that piece, you'll be hit with those taxes. Here we explain how that works. (For more, see: Contemplating Collectible Investments.)
- Collectibles are considered alternative investments by the IRS and include things like art, stamps & coins, cards & comics, rare items, antiques, and so on.
- If collectibles are sold at a gain, you will be subject to a long-term capital gains tax rate of 28%, if disposed of after more than one year of ownership.
- You need to know your cost basis to calculate your taxable gain, and that means the price paid plus any costs, fees, and commissions involved with that purchase.
Collectibles and Capital Gains
Collectibles are taxed pretty heavily. The capital gains tax on your net gain from selling a collectible is 28%. You may also be subject to a 3.8% net investment income tax, depending on your adjusted gross income (AGI). Provided you hold the piece for more than one year, you won't pay more than that amount – even if you're in a high tax bracket. However, this level of tax is considerably higher than the tax rate on most net capital gains, which is an average of 15% for most taxpayers, according to the IRS.
All the same, the 28% rate is advantageous for those in the higher tax brackets compared to taxes on ordinary income – although, by the same measure, those in brackets below 28% will take an extra hit.
The tax rate is set at such a relatively high level because the government isn’t a big fan of the buying and selling of collectibles. Unlike business innovations or comprehensive employee training, collectibles aren’t real economic drivers. In short, the government would prefer capital be put toward efforts that help grow gross domestic product (GDP).
However, all of this is irrelevant if you’re someone who wants to sell a collectible and wants to know about all the tax rules. You already know the capital gains tax on the net sale of a collectible, but there’s more to the story.
What is a Collectible?
A collectible is anything made more valuable due to rarity or popular demand. Simply put, a collectible is “an item worth collecting.” A list of examples will give you a much better idea:
- Rare stamps
- Rare coins
- Rare books
- Baseball cards
- Fine wine
This list goes on and on, but you get the idea.
Calculating Your Basis
When figuring out your tax obligation for selling a collectible, you need to figure out your basis. In order to do this, you can use this simple formula: Cost of item + auction and broker fees = basis. For “cost of item” you can include maintenance and restoration costs.
If you inherited the collectible, the basis is the fair market value of the item at the time of inheritance, which should be based on an appraisal. If the collectible has not been appraised, the fair market value also can be determined by comps (i.e., the price of similar items). The problem with using comps is it doesn’t take into account the condition of your collectible or the collectible being used for comparison.
Once you establish your basis, subtract the basis from the sale price and you will have your net capital gain.
For example, let’s say you inherited an antique table. The fair market value at the time of inheritance was $5,000. You put $1,000 into it for restoration, which you hoped would help increase its value, upping your basis to $6,000. Fortunately, you were correct, and you sold the table for $7,500. You have a net capital gain of $1,500. Your capital gain obligation at 28% is $420. After taxes, you have $1,500 - $420 = $1,080 in net profit.
If you sell a collectible in less than one year, it will be taxed as ordinary income. This could be advantageous if your bracket is less than 28%.
If you buy and sell gold or silver, or gold and silver exchange-traded funds, it will be taxed as a collectible (since gold and silver are considered collectibles). This is important to note so you’re not surprised in the future.
Stick to your circle of competence. In other words, if you know everything about rare stamps and nothing about art, you should never put capital in art. The only exception for going out of your comfort zone is in the public markets, where a lot of information is available to help form an investment opinion; this type of information isn’t available in the majority of the collectibles market.
If you use a collectible for personal use (hanging a painting on a wall in your home as opposed to keeping it in storage), then you will not be able to claim a capital loss.
The Bottom Line
The sale of collectibles can lead to a cash windfall, but the tax obligation will be high for most people. If you’re still not 100% sure or comfortable about the sale of a collectible (or collectibles) and you want to minimize your tax obligation, hire a tax advisor.