If you enjoy collecting antiques and collectibles or investing in fine art, wine, or vintage cars, there may be a time when you’re ready to cash in and reap the financial rewards. But you need to be aware of the tax impact of selling collectibles.
IRS Definition of Collectibles
To serious art and antique collectors, the word “collectibles” often has a negative connotation, conjuring up visions of Hummel figurines, childhood baseball card collections, or your cousin’s long-forgotten high school troll collection. Of course, in some cases, individual items from these collections may be quite valuable; certain vintage PEZ dispensers or Cabbage Patch dolls, for instance. They would fall under the IRS definition of collectibles under the Internal Revenue Code (IRC), which is as follows:
- Any work of art,
- Any rug or antique,
- Any metal or gem,
- Any stamp or coin,
- Any alcoholic beverage, or
- Any other tangible personal property that the IRS determines is a “collectible”
Gold or silver, or gold and silver exchange-traded funds (ETFs) that are bought and sold, are considered collectible and taxed as such. However, taxpayers should be aware that certain coins and metals are excluded from the IRS definition of “collectible.” These include any coin issued under the laws of any state or any gold, silver, platinum, or palladium bullion of a certain fineness if a bank or approved nonbank trustee keeps physical possession of it.
As noted above, the IRS has the authority to deem any tangible property not specifically listed as a collectible. So, collectibles could include such items as rare comic book collections, vintage sports cars, baseball cards, or PEZ containers.
Non-fungible Tokens (NFTs). Recently, the IRS issued preliminary guidance regarding the tax treatment of NFTs (non-fungible tokens) as collectibles and is soliciting comments until June 19, 2023, to determine further guidance. The popularity of NFTs rose during the pandemic, but interest has since waned.
NFTs are defined by the IRS as a unique digital identifier recorded using distributed ledger technology and may be used to certify the authenticity and ownership of an associated right or asset. In simple terms, NFTs represent unique digital assets, typically in the form of visual art, music, and other digital content. They can be bought and sold like any other property and use “distributed ledger technology,” such as blockchain technology, to record transactions and identify ownership.
Collectibles and Capital Gains
The maximum rate on net capital gains from the sale of collectibles is 28%. By comparison, the maximum long-term capital gains rate from the sale of an asset such as a home or stocks is 20%.
If you sell a collectible after holding it one year or less, you will pay short-term capital gains, taxed as ordinary income at your marginal tax rate. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset. Depending on adjusted gross income, taxpayers may also be subject to the net investment income tax of 3.8%. For more information about this tax, see What Is the Net Investment Income Tax? below.
There are two ways to figure the taxable basis of collectibles. If acquired through inheritance, the basis is the fair market value (FMV) at the time it was inherited. If the collectible was purchased, the basis is the cost of the item plus any fees, such as the cost of using a broker. The net capital gain is figured by subtracting the basis from the sale price. Generally, tax liability is less when the collectible has a higher basis.
Consult a Tax Professional
Because the long-term capital gains tax rate on the sale of collectibles is higher than that on regular capital gains, strategies such as selling over multiple years to reduce the amount of taxable gain in a given year are often beneficial to taxpayers.
If you have any questions about how the sale of collectibles affects your tax situation, don’t hesitate to contact us.