Calculating Capital Gains Tax on the Sale of a Collectible

Uncle Sam takes a tax bite out of almost every asset sold and collectibles are no exception. Indeed, collectibles are currently subject to one of the highest rates of federal taxation on investment property. Capital gain from the sale of a collectible is taxed at 28 percent.

What is a collectible?

What is a "collectible?" Of course, collectibles include stamps and coins, fine wines, glassware, and other commonly collected items.

It’s important to keep in mind that less obvious items are often "collectibles." For example, a collection of political campaign buttons and badges can be a collectible. If an item is an antique, it is probably a collectible.  

Higher tax rate

Traditionally, collectibles have been taxed at a high capital gains rate because of public policy arguments. Supporters of high capital gains tax rates for collectibles justify their position by the lack of broader benefits, such as innovation, new products and higher productivity, that society receives from collectibles. On the other hand, society benefits from the preservation of works of art, antiques and many other collectibles.

Currently, the capital gains tax rate for collectibles is 28 percent. This is significantly higher than the capital gains tax rate for stocks, securities and many other investments, which enjoy a 15 percent capital gains tax rate (five percent for taxpayers in the 10 or 15 percent tax brackets).

Understanding basis

Before you calculate gain, you have to have an understanding of basis. If you purchased the item, then your calculations start with the cost of acquisition. These costs include not only what you actually paid for the collectible but also auction and broker’s fees.

Inherited collectibles are treated differently. Your basis is the collectible’s fair market value at the time of inheritance. Most commonly, fair market value is determined by an appraisal but there are other methods. Another way to show fair market value is by looking at current sales of comparable collectibles.

Your collectible may have been a gift from another person. In this case, your basis is the same as that of the person who made the gift.

Many collectibles require special care. You may have spent money to maintain the collectible or restore it.  These costs are also part of your basis in the collectible.

After you have calculated your basis in the collectible, you subtract your basis from the amount you sold the item for. This is your capital gain.

Example. Beverly inherits a 19th century rocking chair from her grandmother. Shortly before she died, Beverly’s grandmother had the chair appraised. Its value was determined to be $2,000. Beverly spends $500 to restore the chair. Two years later, Beverly sells the chair online. Beverly earns $3,900 from the sale. Beverly’s basis in the chair is ($2,500) ($2,000, which was the chair’s fair market value when she inherited it, plus the $500 she spent to restore it). Beverly’s capital gain is $1,400 ($3,900 minus $2,500). As a collectible, it is taxed at 28 percent rather than 15 percent, a difference of $182 in tax.

"Gold bug" advice

The price of gold has almost doubled in the past several years. Investing in gold presents two issues. First, there is the issue of valuing gold coins. When coins have numismatic worth exceeding their face denomination, the amount realized is the numismatic value of the coins, not the face value. Second, if you want to invest in the price of gold rather than in the collectible nature of a gold coin, you should consider investing in gold strictly as a precious metal, such as through gold-mining stocks. That interest, and the gain realized by selling it, is entitled to full capital gain treatment. Do keep in mind however that mutual funds (such as the now defunct US Gold Trust) which buy and sell gold for their shareholders, exchange-traded funds (such as GLD and IAU) which buy and sell gold for their shareholders, and direct purchases of gold bullion and/or gold futures, are considered collectibles! The same applies to silver and other precious metals and gemstones.