Investing Through Collectibles? There’s A Tax For That!

August 29, 2011 | By: TaxCure Staff

collectible tax ratesIf you’re hoping to pay for your child’s college by investing in Beanie Babies, you may be in for a surprise, and not just that you may have paid too much. Making a profit on the sale of collectibles that you held for investment purposes will trigger the capital gains tax, and if this investment was a long-term gain, you may end up paying a higher rate than if you invested in stocks or equities. Profits you make on the sale of other collectible items that weren’t held for the short-term (a year or less) are taxed at your personal income tax rate just as if you invested in stock or bond for the short-term. The IRS defines quite a wide variety of things as “collectibles”, including gold and silver coins, which can trip you come tax time. So when you’re choosing your investment vehicle, be they soft and fluffy or hard and shiny, make sure you keep in mind the tax laws assigned to collectibles.

What Does the IRS Define as Investment Collectibles?

The IRS considers a wide variety of objects to potentially be a collectible. These are the most common types of investment collectibles:

  • Works of art
  • Antiques
  • Rugs
  • Gems
  • Stamps
  • Coins
  • Alcoholic beverages (i.e. a wine collection)

Of course, other items like toys, figurines, or jewelry can be determined to be an investment collectible in certain circumstances. In general, your use of and care for the item helps determine if it’s an investment collectible, whether it falls inside or outside these categories. If you’ve been keeping that footstool carefully maintained in a temperature and humidity-controlled chamber, it’s probably a collectible – if you’ve been putting your feet on it and only discovered it was worth money after Antiques Roadshow came to town, the IRS would be unlikely to consider that an “investment”. Most collectible items that you consider to have value beyond the sentimental are investment collectibles, and if you sell them and make a profit, you’ll need to pay taxes on that profit. (We’ll discuss how to determine your profit below.)

One thing that’s important to remember is that gold and silver coins are considered to be investment collectibles. Most gold investments are taxed at the collectible rate, which also includes any shares you own in gold and silver exchange-traded funds (ETFs). Even though these are shares in gold that is somewhere else, the IRS considers it the same as actually owning pieces of gold, so any profits you make on precious metal ETFs that you have held longer than a year must be taxed at the 28% collectibles rate. However, precious metal closed-ended funds or CEFs (e.g. CEF, GTU) in which precious metal holdings and investor units outstanding remain unchanged are generally not taxed as collectible investments.

Determining Profit on Investment Collectibles

When it comes time to sell a collectible item, classifying it as an investment item may carry some benefits. Money that you pay to buy, appraise, maintain, or sell investment collectibles is added to the cost you paid in order to determine your “basis”, or the amount you actually spent on the item all told. You can also include broker’s fees, restoration costs, and auction fees as part of your basis. So if you bought a painting for $10,000, and spent $400 to have it appraised, $200 to have it cleaned, and paid $200 in listing fees to sell it, your basis is $10,800. If you sold it for that amount or less, you won’t owe any taxes. If you sold it for $15,000, you are only taxed on a profit of $4,200. If this were a piece that you had bought at a garage sale just to decorate your house and found out later that it was worth money, you wouldn’t be able to deduct the money you spent on the painting, because you didn’t intend for it to be an investment.

Things get a little more complicated when an item is a gift or is left to you by someone who is now deceased. If the item is a gift, your basis is whatever the original owner paid for it, but if you inherited it, the basis is “stepped-up”, or increased, to the amount that the item was worth when you received it. Plus, if you inherit the item, you can sell it right away at long-term capital gains rates instead of short-term, even if you haven’t had it for a year yet. You would also then only pay taxes on the amount that the item has gone up in value since you received it, which is unlikely to be much if anything if you sell quickly.

Short term vs. Long Term Capital Gain Rates

We’ve talked about short-term versus long-term capital gains tax rates. In summary, the tax rate you pay on your collectibles (or your stocks, bonds, or other possessions) depends on how long you have owned the item. If it’s less than one year, you will pay short-term capital gains rates. If you’ve had it for more than a year, you’ll pay long-term rates. These rates differ greatly as short-term rates are generally higher than long-term rates but sometimes may be lower in the case of collectible tax rates. If you plan ahead and keep track of when you’ve purchased items, you can save a lot on your taxes by making sure that you don’t sell an item until it qualifies for long-term rates.

The capital gains tax rates on collectibles are much higher than stocks or bonds in the long term. Short term, you will pay the same amount of tax on the profit as you would on money that you earned (at your regular income tax rate.) Depending on how much your total taxable income for the year, this can range from 10% to 35%.

  Short Term Rate Long Term Rate
Collectibles Regular income tax rate 28%
Stocks or Bonds Regular income tax rate 0% to 15% – depends on income

Consider Donating to Get Value Without the Hassle of Selling

One way that you can benefit from the value in your collectibles without having to go through the process of selling is to donate the collectibles to a charity, which will then sell them themselves. You can deduct the fair market value of the collectible piece on your taxes if you itemize. (If you don’t itemize, there is no tax benefit to donations.) You document a donation of investment collectibles in the same manner as donating any other valuable item – if it’s worth more than $250, get a receipt, if it’s over $500, keep some records backing up your claim of its fair market value, and if it’s worth $5,000 or more, you’ll need an appraisal. “Collectibles With Causes” is an organization that helps connect collectors with charities that are looking to accept donations of investment collectibles.