You’ve spent years building your personal wine collection, methodically acquiring the highest-rated and most sought-after bottles from around the world to stock your wine cellar. One day down the road, you decide to sell your world-class collection. After exploring options, you decide to list your collection with a major auction house—maybe it’s Christie’s, Sotheby’s or Bonhams. Your collection sells. You collect your profit, your reward for your years of curating, searching and purchasing.
But, your responsibilities don’t end there, certainly not to the Internal Revenue Service. According to the IRS, the earnings on the collection you just sold is classified as a capital gain, which is the difference between what you paid for the asset and what you sold it for. And, capital gains for collectibles are taxed at a maximum long-term capital gains rate of 28%, notably higher than the standard 0%, 15% and 20% capital gain rates. These gains may also be subject to a 3.8% net investment income tax, bringing the total tax rate to 31.8% on your collectibles.
Most people have some sort of collection. Maybe that collection is made up of baseball cards from your childhood, comic books, artwork or trains. So when exactly do collections become noteworthy for tax purposes?
What Are Collectibles?
The Internal Revenue Service defines collectibles in IRC Section 408(m)(2). Collectibles include, but are not limited to the following:
- Any work of art
- Any rug or antique
- Any metal or gem
- Any stamp or coin
- Any alcoholic beverage
- Certain gold, silver or platinum
- Any coins issued under the laws of any state
In addition, Exchange Traded Funds (ETFs), backed by precious metals like gold and silver, are treated as collectibles for tax purposes.
Although many clients do, in fact, have collectibles, most are not aware of the higher maximum capital gains rate on them. As the collector, it is your responsibility to report your capital gains from the sale of collectibles. The onus does not fall on a third party.
Managing the Tax Implications of Collectibles
So how do we help clients manage their capital gains from collectibles? The simplest way to avoid paying taxes on collectibles is not to sell them at all. In the case of a wine collection, that may mean uncorking your bottles to enjoy among family and friends.
Another option for avoiding capital gains tax is to donate your collectible to a charity. This option translates to a charitable-giving-related tax deduction rather than a tax obligation.
For those who choose to sell their collections, tax bracket management is especially important. In some situations, recognizing the gain as short term may result in a lower tax liability. Short-term capital gains, or gains from the sale of assets you owned for one year or less, are subject to ordinary income tax. That means that with proper planning, it may be possible to avoid the maximum 28% tax rate on long-term capital gains.
Similar to selling other assets like stocks, timing the sale of your collectibles can also have an impact on your tax liability, as capital gains are balanced by capital losses. As your tax partner, these are strategies we regularly evaluate, advise our clients about and implement.
A Shared Mindset for Growth – Get in Touch with Us
Managing the tax implications of collectibles is certainly nuanced, a fact that cements the benefits of consulting with a proactive tax partner when you’re considering next steps for your collections.
For more information on how our tax advisors can guide you through the sale of collectibles, contact us here, call us at 561.453.1441 or request a free tax planning consultation.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.