Collecting Taxes on Collectibles
By: Clark, Campbell, Lancaster & Munson, P.A.
Do you have a collection that you wish to sell? If so, the IRS may determine that your collection is composed of “collectibles” and apply a 28% capital gains tax rate to any gain you may acquire from the sale of your collection. Generally, for most taxpayers, the capital gains tax rate is 15%.
Q: What are collectibles?
A: The IRS has stated that the following are collectibles:
- Works of art;
- Alcoholic beverages;
- Musical instruments;
- Historical objects; and
- Any other tangible personal property specified by the Secretary for purposes of this subsection.
Notably, comic books, toys, and cars are not explicitly provided in the above list. However, the IRS has the discretion to consider such items as collectibles depending on the facts and circumstances.
Q: What is an example of tangible personal property that the IRS may consider a collectible?
A: Taxpayer collects dolls from a popular toy company and keeps her collection in a climate controlled storage unit. Taxpayer sells five dolls from her collection for $1,000.00. Taxpayer’s dolls may be considered a collectible if taxpayer’s treatment of her collection indicates that she is attempting to preserve her collection’s value, the collection has considerable value, the dolls are sought after collectors, and the taxpayer has no personal use for the dolls.
Q: I have an item that is considered a collectible; will I automatically be subject to the 28% capital gains tax rate for any gain I may acquire from the sale of my collectible?
A: Not necessarily. In order for the 28% capital gains tax rate to apply, the item must be held by the taxpayer for more than a year. For example, if taxpayer bought a collectible in January 2017 and sold the same collectible in April 2017 for a profit, then the sale will not be subject to the 28% capital gains tax rate because taxpayer held the collectible for less than a year. Instead, the sale of the collectible will likely be taxed as ordinary income.
Q: How do I determine basis in my collectible?
A: It depends on how the collectible was acquired. For example, taxpayer’s great grandmother bought a collectible in 1960 for $3.00, and at the time of her death, the collectible was valued at $1,000.00. If taxpayer inherited the collectible from her great grandmother, then taxpayer’s basis in the collectible will be its fair market value at the time of inheritance, which is $1,000.00. If taxpayer’s great grandmother gifted the collectible during her lifetime to the taxpayer, then taxpayer’s basis in the collectible will be her great grandmother’s basis in the collectible, which is $3.00. If taxpayer bought the collectible from an auction, then taxpayer’s basis in the collectible will be the amount taxpayer paid for the collectible, plus any auction fees. Finally, a taxpayer’s basis in a collectible may increase due to maintenance and restoration costs to preserve the collectible’s value.
Q: Are there any other tax consequences that I should consider?
A: Yes. Generally, collectibles are sold at a loss. Whether a taxpayer will be able to claim a loss from the sale of a collectible will depend on whether the taxpayer personally used the collectible and whether the taxpayer is engaged in a hobby or a business.
If you are unsure whether you have a collectible or whether you may claim a loss from the sale of your collectible, it is advisable to seek counsel from a tax professional.