Collectibles Boom, Selling Can Be Taxing
the past two years, five paintings have
been sold at auction for more than $100
million apiece, while another (by Cezanne)
reportedly brought more than $250 million
in a private sale. In the same time frame,
a pink diamond was auctioned for a record
you can see, the collectibles market has
been booming. You might not own a multimillion
dollar item, but the chances are that
the coins, stamps, or paperweights that
you collect have grown in value. If you
decide to cash in by selling one or more
pieces from your collection, you may have
to deal with unpleasant tax surprises.
The tax code has special treatment for
collectibles, which can include artwork,
rugs, antiques, gems, stamps, metals,
coins, and alcoholic beverages, according
to the IRS. When you sell collectibles,
the special 0%, 15%, and 20% tax rates
on long-term capital gains don't apply.
Instead, you'll owe tax at your ordinary
tax rate, with a cap of 28%.
is the case with all assets, short-term
capital gains on the sale of collectibles
are taxed at ordinary rates.
1: Dan King bought a rare U.S. coin
for $1,000 and sold it 11 months later
for $1,300. Dan's $300gain was short-term,
so he owes tax at his ordinary rate, 15%
in this example.
bought another coin at the same price
at the same time; he sold that coin for
a $300 gain as well. This coin, though,
was sold 13 months after Dan's purchase.
Because the holding period was over one
year, Dan reports the $300 as a long-term
a long-term capital gain is taxed at a
0% rate by taxpayers in the 15% tax bracket,
such as Dan. That would be the case, for
example, if Dan had a $300 long-term gain
on a stock sale. A long-term collectibles
gain, though, doesn't qualify for the
0% rate. Thus, Dan will owe 15% in tax
on this $300 gain ($45) from the second
coin sale, just as he does on the first
(short-term) coin sale.
taxpayers in the next higher tax brackets
(25% and 28%) also owe tax at their ordinary
rate on long-term gains from collectibles.
Taxpayers in higher brackets (33%, 35%
and 39.6%) do get some tax break from
long-term gains on collectibles because
the rate does not exceed 28%.
2: Emily Larsen has taxable income
over $500,000, so she is in the top 39.6%
tax bracket this year. She sells a painting
for a $20,000 gain after holding the artwork
for several years. On long-term gains
from a stock, Emily would owe tax at the
special 20% rate. However, Emily doesn't
qualify for the 20% tax rate on the sale
of the painting because it is a collectible.
Emily's tax rate is higher than 28%, so
she will owe the maximum 28% rate on her
$20,000 long-term collectibles gain: $5,600
If you plan to sell collectibles at a
loss, be aware that the tax code still
works against you. If you sell collectibles
for which you had "personal use,"
you can't claim a capital loss, and selling
collectibles for which you had personal
use at a profit will still result in a
taxable capital gain.
use will depend upon specific circumstances.
Hanging a painting on the wall of your
home might be considered personal use,
depriving you of any tax benefit from
a loss on a subsequent sale. However,
if you regularly buy a specific type of
painting, keep some in careful storage
when not on display, and maintain careful
records of your collection, you might
be able to make the case that the artworks
were held for investment purposes. Such
efforts could result in a capital loss
that provides tax benefits. Our office
can help you determine if your collectibles
may be treated as investment property.
Net Investment Income Tax