What Are the Capital Gains Tax Rules for Collectibles?

When you sell personal items like artwork or antiques for a profit, the gain is subject to tax. The Internal Revenue Service (IRS) classifies these assets as “collectibles,” which are taxed at a special, higher capital gains tax rate than other investments like stocks or bonds. Understanding if your item is a collectible is the first step in determining your tax obligation.

What Qualifies as a Collectible

The IRS defines a collectible as a tangible asset expected to appreciate in value, and this classification is based on the item’s nature, not its use. Whether you are a serious investor or a hobbyist, the tax law views the sale of a collectible in the same way. The primary categories of collectibles identified by the IRS include:

• Works of art, rugs, and antiques
• Stamps
• Most coins, with an exception for certain U.S.-minted gold and silver coins
• Precious metals and gems
• Alcoholic beverages, such as rare wines, held as an investment

Calculating Your Gain or Loss

To determine your tax, you must first calculate your profit or loss, known as a capital gain or loss. This is done by subtracting the item’s “cost basis” from its final sale price. The basis represents the total amount of your investment in the collectible.

For a purchased item, the cost basis is the original price plus any additional costs from the acquisition. These can include buyer’s premiums, commissions, shipping fees, and the cost of restorations.

The rules for basis change if you acquired the collectible differently. If you inherited the item, your basis is its fair market value on the date of the original owner’s death, known as a “stepped-up basis.” For a gifted collectible, you generally assume the original owner’s cost basis, a rule known as “carryover basis.”

Applying the Correct Tax Rate

The tax rate on your gain depends on how long you owned the collectible. This holding period determines if the profit is a short-term or long-term capital gain.

If you owned the collectible for more than one year, the profit is a long-term capital gain taxed at a maximum federal rate of 28%. For example, even if you are in a tax bracket that qualifies for a 15% rate on stocks, your profit from a collectible is taxed at the higher 28% rate.

If you held the collectible for one year or less, the profit is a short-term capital gain. Short-term gains are taxed at your ordinary income tax rate, which can be as high as 37%. If you sell a collectible at a loss, you can use that capital loss to offset other capital gains, but you cannot claim a loss on the sale of a personal-use item.

Reporting the Transaction to the IRS

You must report the sale of a collectible on your annual tax return, as failing to do so can lead to penalties and interest from the IRS. The process begins with Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you will list a description of the item, the dates you acquired and sold it, the sales price, and your cost basis.

After completing Form 8949, you transfer the totals to Schedule D, Capital Gains and Losses. Schedule D summarizes all your capital gain and loss activity for the year. The net gain is then carried to your Form 1040 and included in your taxable income.

Collectibles Held in Retirement Accounts

The IRS prohibits holding most collectibles within a self-directed Individual Retirement Arrangement (IRA). Purchasing a collectible with IRA funds is treated as a “deemed distribution.” This means the purchase amount is considered a distribution from your IRA in the year of the purchase.

That amount becomes taxable income for the year. If you are under age 59 ½, you may also face a 10% early withdrawal penalty on the distributed amount.

A limited exception exists for certain U.S.-minted gold, silver, and platinum coins. The exception also applies to specific types of gold, silver, platinum, and palladium bullion that meet minimum fineness requirements.