Breaking the Code: Tax on Collectibles
By: Tyler Nguyen
An intriguing topic for many individuals with family heirlooms or perusers of antique stores are collectibles. Collectibles include any work of art, any rug or antique, any metal or gem (with limited exceptions), any stamp or coin (with limited exceptions), any alcoholic beverage, or any other tangible personal property specified by the Treasury. Collectibles must be held for greater than one year. Other examples of collectibles include sports memorabilia, stamps, comic books, and non-fungible tokens (NFTs). NFTs have emerged in recent months as the next hot ticket item; in short, they are digital collectibles stored on blockchains, similar to how cryptocurrency is stored.
Taxpayers that deal with collectibles can be broken up into four categories: dealers, creators, investors, and collectors. All treat income, losses, and expenses uniquely.
Dealers & Creators
Dealers of collectibles are considered a trade or business recognized by the IRS, which means that they can deduct any expenses relating to the collectibles they deal with. Any gain / loss is treated as ordinary income and is taxed at marginal tax rates.
Creators of collectibles incur ordinary income when selling their collectibles, taxed at marginal tax rates. However, unless they can prove they are a trade or business recognized by the IRS, their expenses / losses are typically nondeductible.
Investors & Collectors
Investors selling collectibles are taxed at 28%, higher than the typical preferential long-term capital gain tax rates. Any losses are subject to the same carryforward rules as capital losses. Prior to the Tax Cuts and Jobs Act of 2017, expenses for investors were deductible, although they are currently suspended through 2025.
Collectors of collectibles will have the same capital gain treatment as investors (28%), but any expenses / losses are always nondeductible.
Charitable Planning
When donating collectibles to charities, the treatment can also vary depending on the taxpayers’ involvement and specification. For investors and collectors in which the collectible is donated to public charity and used for the charity’s exempt purpose (i.e. donating artwork to be shown in an art museum), the fair market value of the collectible can be taken as a charitable deduction. The deduction is limited to 30% of AGI; any excess deduction can be carried over to the next five years.
For situations in which the collectible is donated to a private charity, for purposes other than the exempt purposes (i.e. donating artwork to be sold for income to a science museum), or if artwork is gifted by the creator, only the cost basis of the collectible can be taken as a charitable deduction. The deduction is limited to 50% of AGI; any excess deduction can be carried over to the next five years.
There are other scenarios in which a portion of the donation would qualify as a charitable deduction. A bargain sale, when collectibles are sold to a charity under fair market value, triggers both capital gain as well as a charitable deduction. Donations of undivided fractional interest in a painting, in which the charity gains full control over the asset within ten years of donation, allow for partial charitable deductions as well.
If you are considering selling or donating the artwork or antiques sitting around your home, please feel free to reach out. There are many options available and we can help determine potential tax impact of your individual situation.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.