In 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 $83 million.
As 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.
Raising the rates
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%.
As is the case with all assets, short-term capital gains on the sale of collectibles are taxed at ordinary rates.
Example 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.
Dan 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 capital gain.
Normally, 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.
Similarly, 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%.
Example 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 in tax.
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.
Personal 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.