How the 28% Collectible Tax Rate Works

When investors sell assets for a profit, they generally owe capital gains tax. However, not all capital gains are treated equally by the Internal Revenue Service (IRS). The tax code establishes a special category for certain items known as “collectibles,” which are subject to a unique and often higher tax rate than gains from other investments like stocks or bonds.

What the IRS Considers a Collectible

The IRS provides a specific definition of what constitutes a collectible asset for tax purposes. The primary categories listed under Internal Revenue Code Section 408(m) include works of art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages. For instance, a painting, a vintage Persian rug, or a rare bottle of wine would each fall under this classification. The category of metals includes precious metals like gold, silver, and platinum bullion, while gems refer to precious stones.

Beyond these enumerated categories, the tax code contains a “catch-all” provision that includes any other tangible personal property that the IRS determines is a collectible. This gives the agency flexibility to classify new types of valuable items, such as rare comic books or vintage sports memorabilia, as collectibles. The core idea is that if an item’s value is based on its rarity or historical significance rather than its practical use, it will likely be considered a collectible.

Certain U.S.-minted gold, silver, and platinum coins, as described in Title 31 of the U.S. Code, are not treated as collectibles. Similarly, bullion of a specific fineness is not considered a collectible if it is held by a bank or an approved non-bank trustee.

Understanding the 28% Collectibles Tax Rate

The profit from selling a collectible is subject to a special long-term capital gains tax rate with a maximum of 28%. This rate applies only if the asset was held for more than one year before being sold.

This 28% maximum rate stands in contrast to the standard long-term capital gains rates for most other investments, such as stocks and bonds, which are 0%, 15%, or 20%, depending on the taxpayer’s overall income. The higher potential rate for collectibles can result in a larger tax liability compared to an identical gain from selling a stock held for the same period.

The 28% rate is the maximum rate. If a taxpayer’s ordinary income tax bracket is below 28%, their long-term collectibles gain will be taxed at their lower ordinary income rate. For a collectible held for one year or less, the profit is considered a short-term capital gain. Short-term gains are taxed at the individual’s ordinary income tax rates, which can be as high as 37%, the same treatment that applies to short-term gains from any other type of asset.

How to Calculate and Report Gains on Collectibles

To determine the taxable profit from the sale of a collectible, you must calculate the capital gain, which is the asset’s selling price minus its cost basis. The cost basis is not just the original purchase price; it also includes any associated costs to acquire the item, such as commissions, auction house premiums, or appraisal fees. Tracking these expenses is important as they increase the basis and reduce the taxable gain.

The transaction must be detailed on Form 8949, Sales and Other Dispositions of Capital Assets. For a long-term gain, the sale is entered in Part II of the form. You must enter code “C” in column (f) of Form 8949, which flags the gain as originating from a collectible. This code ensures the gain is subjected to the correct tax calculation.

After completing Form 8949, the totals are transferred to Schedule D, Capital Gains and Losses. The final tax on the collectible gain is calculated using the “28% Rate Gain Worksheet,” found within the Schedule D instructions. This worksheet isolates the collectibles gain from other capital gains to apply the appropriate 28% rate.

The tax code also has specific rules for netting capital gains and losses. A loss from the sale of a collectible must first be used to offset any other gains from collectibles sold during the same year. If there is still a net collectible loss, that loss can then be used to offset other types of capital gains, such as those from stocks. The total amount of capital losses an individual can deduct against other forms of income in a single year is limited.

Special Scenarios for Collectible Investments

One common scenario with unique tax implications is inheriting a collectible. In this case, the heir benefits from a “stepped-up basis.” This means the cost basis for the heir is the collectible’s fair market value on the date of the original owner’s death, not what the original owner paid. This provision can significantly reduce the capital gains tax owed if the asset is later sold.

Investing in collectibles through an Individual Retirement Account (IRA) is generally not permitted. The tax code treats the acquisition of a collectible by a traditional or Roth IRA as a taxable distribution to the account owner equal to the cost of the collectible. There is a limited exception for certain highly refined gold, silver, platinum, and palladium bullion and specific government-minted coins held by a trustee.

Like-kind exchanges previously allowed investors to defer capital gains taxes by exchanging one investment property for a similar one. The Tax Cuts and Jobs Act of 2017 significantly changed this provision. Effective January 1, 2018, Section 1031 like-kind exchanges are only available for real property. This tax-deferral strategy can no longer be used for exchanges of personal property, a category that includes all collectibles.