Capital gain from the sale of a collectible held for more than one year is taxed at 28 percent.
That is significantly higher than the capital gains tax rate for most investments, which are taxed at a maximum 15 percent rate, 5 percent for taxpayers in the 10 or 15 percent tax brackets. Short-term investments in collectibles are taxed as short-term capital gains at ordinary income tax rates.
As you can see, the rate on collectibles is almost double the rate on other investments, and that can make a big difference. A few years ago, Sen. John Kerry made the newspapers when a review of his tax return showed that he reported tax on the sale of a painting at a $175,000 gain at the then-new 15 percent capital gain tax rate, when it should have been taxed at 28 percent as a collectible.
Collectibles include stamps and coins, fine wines, works of art, rugs, antiques, metal, gems, glassware and other commonly collected items. A collection of political campaign buttons and badges can be a collectible. If an item is an antique, it is probably a collectible.
Gain on the sale of collectibles has traditionally been taxed at a high rate because of public policy arguments. The argument is that investment in collectibles is not good for the economy. It does not create jobs, make products or perform services. Collectibles don't provide a benefit to society through innovation, new products and higher productivity.
Opponents to the high rate of tax on collectibles cite the benefits to society from the preservation of works of art, antiques and other collectibles.
Similar policy reasons are behind the prohibition on having collectibles in your IRA. According to the Joint Committee on Taxation, collectibles do not contribute to productive capital formation and the self-dealing rules may not adequately prevent personal use of collectibles. There is an exception from the definition of collectible for certain coins minted in the United States and gold, silver, platinum or palladium bullion that is in the physical possession of the trustee of the IRA.
If you buy and sell the items as a dealer, they are your inventory and not capital assets. Thus, if you have a flea market stand or deal in antiques, your gains are ordinary income.
The amount of gain to be recognized on the sale of a collectible requires the determination of cost basis. Keep in mind that it is your responsibility to substantiate your basis. If you cannot, the IRS assumes the basis of your item is $0.
If you bought the item, your basis is the cost of the item including any auction or broker's fees. Items you inherited have a "step-up" basis of the fair market value at the date of death of the person from whom you received the item. Items received as gifts have a "carryover" basis. That is, you take over the basis of the person who gave the item to you. If your item requires special care, such as special storage, those costs can be added to your basis.
Because metals are considered to be collectibles, when investing in gold or silver, the 28 percent rate must be kept in mind.
Mutual funds that buy and sell gold for their shareholders, exchange-traded funds that buy and sell gold for their shareholders and purchases of gold bullion or gold futures are considered to be collectibles. Also included in the definition of collectibles are investment coins that substitute for bullion, such as the American Eagle and the American Buffalo.
Do you think it's unfair to have a higher rate on collectibles? Call your representatives in Congress. A bill has been introduced in Congress that would amend the Internal Revenue Code to provide the same capital gains treatment for art and collectibles as for other investment property.
E-mail: Patti@spencerlawfirm.com