Taxpayers who enjoy collectibles should know that the IRS views these items as personal or business capital assets. While there is no immediate tax consequence upon making a purchase to add to a prized collection, the taxpayer may eventually pay capital gains tax on collectibles. In instances in which the value of the item fluctuates during ownership, there is generally no tax consequence. However, once the collectible’s owner disposes of the item through sale or otherwise, the owner may be required to pay a tax.
The amount of capital gains tax an individual is required to pay on a capital asset is determined by how long the person owns the item as well as his or her income bracket. Those who hold a capital asset for longer than a year are considered to have a long term capital gain. A tax rate of 0% is applicable to taxpayers who are in the 10 to 15 percent tax bracket. For income that falls within the 25, 28, 33, or 35 percent tax bracket, a capital gains rate of 15 percent is assessed. Taxpayers who are in the 39.6 percent tax bracket are required to pay a 20 percent long term capital gains tax. For collectibles that are held less than one year, the capital gains tax rate is equal to taxpayer’s ordinary income tax bracket.
The rules for capital assets differ slightly when it comes to collectibles, which are taxed at a capital gains rate of 28 percent. Furthermore, taxpayers are not allowed to deduct capital losses on the sale of personal use property such as collectible cars. Characterization of a collectible as a personal use item can be very subjective and depends largely on facts and circumstances. Taxpayers who wish to donate a collectible should have the item appraised, especially in the case of high value assets that are worth $5,000 or more.
For the most accurate advice about paying capital gains tax on collectibles, taxpayers should consult their trusted accountant. Gary Kaplan is a seasoned CPA, serving taxpayers in Florida, Maryland, Washington, D.C., New York, and Utah. He is available to assist individuals and businesses with a comprehensive spectrum of tax preparation and planning needs.
