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If you are one of the 5 million-plus viewers of the TV show “Pawn Stars” or an avid “Antiques Roadshow” fan, you know that a random collectible — say, the first issue of the Superman comic books or one of the five 1913 Liberty Head V nickels known to exist — may be worth a great deal of money. Of course, Uncle Sam knows this as well. So the IRS has developed guidelines that govern the taxes imposed on sales of collectibles and the deductions allowed when collectibles are donated to qualified charities.
Gains and Losses on Collectibles
The IRS views most collectibles, other than those held for sale by dealers, as capital assets. As a result, the gain or loss on the sale of a collectible that you’ve had for more than one year generally is treated as a long-term capital gain or loss.
However, while long-term capital gains on many types of assets are taxed at either 15% or 20%, capital gains on collectibles are taxed at 28%. (As with other short-term capital gains, the tax rate when you sell a collectible that you’ve had for one year or less typically will be your ordinary-income tax rate.) Moreover, the IRS generally won’t allow you to deduct any losses when you sell collectibles that you’ve held for your personal use.
Determining the gain or loss on a sale requires first determining your “basis” — generally, your cost to acquire the collectible. If you purchased it, your basis is the amount you paid for the item, including any brokers’ fees.
If you inherited the collectible, your basis is its fair market value at the time you inherited it. The fair market value can be determined in several ways, such as by an appraisal or through an analysis of the prices obtained in sales of similar items at about the same time.
Donations of Collectibles
If you want to donate a collectible, the tax treatment of the donation will likely depend both on its value and on the way in which the item will be used by the qualified nonprofit organization receiving it. (A “qualified” nonprofit is one that qualifies for tax-exempt status under the Internal Revenue Code.)
For you to deduct the fair market value of the collectible, the donation must meet what’s known as the “related use” test. That is, the nonprofit’s use of the donated item must be related to its mission. This probably would be the case if, for instance, you donated a collection of political memorabilia to a history museum that then puts it on display.
Conversely, if you donated the collection to a hospital, and it sold the collection, the donation likely wouldn’t meet the related-use test. Instead, your deduction typically would be limited to your basis.
There are a number of other rules that come into play when making donations of collectibles. For instance, the IRS generally requires a qualified appraisal if a deduction for donated property tops $5,000. In addition, you’ll need to attach Form 8283, “Noncash Charitable Contributions,” to your tax return. With larger deductions, additional documentation often is required.
The tax implications of selling or donating collectibles quickly can become complicated. Your BLS advisor can help you determine how to properly handle these transactions