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I want to sell an old coin to an antique dealer. Will I have to report that transaction on my income tax return?
If you sell a painting, sculpture, gem, or bottle of fine wine, anything that people collect , you probably owe taxes on the profits. The idea is relatively new. In 1997, Congress set up a new tax rate on money you make when you sell anything that could be considered a collectible.
If you own a collectible for more than a year, then sell it, you are taxed at a capital gains tax of 28%, instead of the usual 15%. This tax only applies to you if your income places you in a tax bracket higher than 15%, but unfortunately, many Americans fall into this category.
What is a Collectible?
According to the IRS, collectibles include any of the following; if you have held them for more than a year.
- A work of art
- A rug
- An antique
- Any metal or gem
- A stamp
- A coin
- Any alcoholic beverage
Before You Sell, Think Taxes: Key Questions to Ponder
Have I owned this thing for more than a year?
If so, it counts as a collectible for purposes of the long-term capital gains tax.
Has the collectible grown in value while I have owned it?
If so, you are facing a possible capital gains tax at 28% when you sell. (If the value has declined, though, you can sell for a loss and have a capital loss to reduce any 28% capital gains you have.)
Must I sell it?
Or could I transfer it to my heirs, to avoid the taxes due on a sale? (If your estate is moderate, it may not have to pay estate taxes.)
Options to Consider
Hold on to those collectibles and pass them on to your heirs.
This way, the collectible items escape capital gain taxation entirely, even though your estate will have to include the value of your collectibles if it's required to file an estate tax return. These days, your estate is likely to avoid estate taxes altogether. See Do I Need a Will or a Living Trust? and The Gift Tax.
Sell your collectibles when you have a long-term capital loss carryover from last year (because you had more capital losses than you were allowed to deduct).
If you do this, the capital gains from your collectibles will be offset before your capital gains from other assets are offset. This is a good thing because the capital loss reduces the amount of gain that's taxed at 28% as opposed to 15%.
In other words, if you sell your collectibles and another appreciated investment such as stocks, you can use the loss to shield taxation on the collectibles at 28%, and leave the capital gains on the stock sale at 15%.
So, if financial circumstances force you to sell those antiques, think about the timing of your sale with respect to any other appreciated investments that you're also planning to sell.
If you inherit collectible items that you have absolutely no intention of keeping, sell them as soon as you can after you inherit them (if it makes sense market-wise).
Why? Because your tax basis in those items is their fair market value on the date of the decedent's death, not on the date you received them. If you sell soon enough, you will have little or no gain on your sale, assuming that the market in your collectible item isn't highly volatile.
The bottom line is that you need to think about how you want to handle investing in and selling collectible items. Of course, if you collect for the long term, you could just wait and see whether Congress changes the capital gains tax laws again. It's happened often enough in the past.
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