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X is for Ta”X”ing Collectibles

Ta"X"ing Collectibles and What to e"X"pect

What is the meaning of Collectibles?

Collectibles are items made valuable due to their rarity or popular demand. Examples include art, rare coins/stamps, antiques, fine wine, etc.

The ta”X”ing of collectibles can be complicated. But having a comprehensive plan in place can help reduce the burden one encounters when selling these heavily taxed valuables.

The capital gains tax on your net gain from selling a collectible is 28%. If you keep the piece for one year, you will not pay any more than this amount regardless of your tax bracket. The 28% rate is advantageous for those in higher tax brackets compared to taxes on ordinary income.

If you sell a collectible in less than one year, it will be taxed as ordinary income. Which is beneficial to those in a bracket lower than 28%.

Here are a few essential items to consider when making your plan:

Utilize the New Estate Tax Exemption Law

Leaving your collectibles to heirs allows an exemption of up to $11.2 million, or 22.4 million as a couple. These massive tax savings are set to expire in 2025. This opens a seven-year window to take advantage of this gifting opportunity.

Donate to Charity

When donating collectibles during a lifetime, it must be of related use to the charity to receive a tax deduction for its full value, up to 30% of the donor’s gross income. Examples would be donating art to an art museum.

Collectibles may also be put into a trust that will be directed to pass collectibles to Charities over time giving the benefit of held control, upfront deductions and potential income stream for a trust’s term. If collectible donations are made through a will, its full value can be used to reduce your taxable estate.

Collect Only What You Know

Putting capital into collectibles in which you have a lot of experience and knowledge will help keep you in a safer comfort zone when you do go to sell.

There are many other considerations to keep in mind when collecting and selling collectibles. If you are not fully aware of the tax obligations on a sale of a collectible, be sure to consult with your trusted tax advisors. And create a plan that helps minimize any tax obligation.

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