A 1979 Wayne Gretzky rookie card sold for $1.79 million in December, while a Mickey Mantle rookie card brought in $5.2 million. Online collectible sales exploded. U.S. sales of collectible trading cards were up 142%, and non-U.S. sales surged 162% last year, according to eBay. Sotheby’s reported a 30% increase in online auction sales. With big gains comes the inevitable: taxes.
What is a Collectible?
Just about any item whose market value has significantly increased since it was first purchased could be considered a collectible. Collectibles include: works of art, baseball cards, rare books, rugs or antiques, metals, gems and jewels, rare coins or stamps, fine alcoholic beverages, and any other tangible personal property specified by the revenue code.
Calculating Your Basis
When figuring out your tax obligation for selling a collectible, you first need to figure out your basis. Use this simple formula: Cost of item + auction and broker fees = basis. For “cost of item” you can include maintenance and restoration costs. If you inherited the collectible, the basis is the fair market value of the item at the time of inheritance, which should be based on an appraisal. Once you establish your basis, subtract the basis from the sale price and you will have your net capital gain or loss.
Collectibles and Capital Gain and Loss
If the taxpayer has a loss upon selling a collectible, the treatment of that loss may depend on other factors. Whether the taxpayer was holding the collectible as an investment asset or as a personal asset depends on the taxpayer’s intent. A taxpayer is considered to be an investor when the taxpayer acquires and holds a collectible asset with the primary expectation of selling it at a profit. In contrast, a taxpayer is not considered to be an investor when the taxpayer acquires the collectible primarily for personal use and enjoyment without consideration of whether the asset will appreciate. Capital losses are non-deductible when the loss arises from the sale or disposal of a personal asset.
Generally, gains from the sale of collectibles are taxed at a maximum rate of 28%.
Net Investment Income Tax
Some taxpayers might be subject to a 3.8% surtax, commonly called the Net Investment Income tax. It may be imposed if you report modified adjusted gross income (MAGI) over $200,000, or over $250,000 on a joint tax return. Your Net Investment Income tax amount will depend on your MAGI and your overall investment income. This surtax may effectively increase the tax you owe on sales of collectibles to 31.8%.
The Taxation of Collectibles is quite a detailed and complex structure. Contrary to general capital gains and losses, collectibles have separate regulations of their own, which are dealt with in a different manner. Due to the higher tax rate on gains from the sale of collectibles, taxpayers should consider a number of strategies that can reduce the amount of collectibles gains. Tax strategies such as loss harvesting, installment sales, or charitable funding might be great options when assessing how to maximize the value of your collectible and minimize your tax exposure.
Contact us if you would like to get started with an analysis, tax return, or to book a consultation to discuss tax strategy.