The American Dream, good job, great family, nice house and of course paying your taxes. Oftentimes, good taxpayers have pretty simplistic tax forms, with regular income and withholding, there can be very little of real scrutiny by the IRS. One issue that crops up from time to time is the Capital Gain.
"Capital gain??? I'm not Warren Buffet", said every typical taxpayer. I do not want to bore you with all the nitty gritty details as that job is reserved for your boring accountant (because tax lawyers are sooo fun!). Suffice it to say almost everything you own and use for personal or investment purposes is a "capital asset", and therefore can be charged capital gains tax when sold. These items include a home, household furnishings stocks and bonds. Your home's capital gain is often excludable (see my previous post "Blame Canada") which is why many typical taxpayers have little contact with capital gains issues.
The item I want to focus on which can upend the tax life of the typical taxpayer is capital gains on Collectibles held more than a year. Yes, that's right the IRS is coming after your comic book collection and Pokémon Cards you nerds! Muscle car enthusiasts, art lovers, and music instrument aficionados you are all equally targeted in the eyes of the IRS.
While typical capital gains rate sits comfortably at 15%, the IRS deems "Collectibles" to be great taxable items and holds their rate at a whopping 28%. These include works of art, antiques, rugs, gems, stamps, coins, gold, silver and even alcoholic beverages (i.e. a wine collection).
This means like any capital gain you have to determine your "basis" or the amount you spent on the item prior to its sale. The purchase price, broker's fees, restoration costs all are added to your basis and whatever profit you've made over the total amount is then taxed at 28%. Now, that's all well and good for a Picasso painting worth millions with the heaped on extra costs. But what about your comic book, or action figure that's been sitting in its original packaging for 30 years. You bought it for a dollar and have had no extra costs associated other than keeping it dry in your parents basement. Take the Amazing Spider-Man #300 (May 1988), with an original sale price of $1.50. Such a copy is typically valued and sold at around $5,000. Which means with no added costs the gain on such an item is $4,998.50, with a taxable event of $ 1,399.58. That is a nice chunk of change for something that has been safely held for nearly 30 years. Taxpayers can be blissfully unaware of this issue and are shocked when it is found in an audit and heaped along with penalties and interest.
Some specialty items need to be mentioned and specifically highlighted:
- I mentioned muscle cars above and not just to include all types of collectors. Cars are an ambiguous collectible. While most typical collectibles that the IRS lists are all items that are stored in a certain special way so as to make them noticeable as a designated collectible, cars, even collectible cars, are made to be driven. Typically when an item has been regularly used for years and then it's revealed at the Antiques Roadshow that your everyday coffeemaker is worth $1,000, this item would not be considered a collectible. A car however is the tough choice as to where it falls in. This is a facts heavy determination that would be unique to each case. The tax code outlines the specific collectible items I named above but includes an ambiguity; "any other tangible personal property specified by the Secretary." The IRS is simply keeping its options open so that it can lump any other item into the higher rate should it choose to. So, is car collection something you are regularly involved in, or is the vehicle in question your old fiat from college? How often did you use it and was it to advertise it to the neighborhood or really for mundane purposes. When it was purchased was it to use, sell, or invest? Were there any restoration projects or expenses etc.? Was the car somehow preserved, separated, or cared for in some special manner? All these questions will be asked and require an answer by your accountant, at an audit or legal proceeding. There is an argument in ambiguity, but you need to back up the fact that this was simply a car that increased in value over time and was not a car purchased to be restored, stored and sold for a profit.
- Gold and silver coins are explicitly mentioned in the code, which brings up thoughts of pirate booty or Indiana Jones. It is important to note however that gold investments are also taxed at the collectibles rate, which would include any shares you may own in gold and silver exchange traded funds (ETFs) The IRS considers these profits to stem from ownership of actual pieces of gold, so any profit you make in such funds that you have held for over a year will be taxed at the 28% rate. It's not time to sell all your gold bullion yet though as precious metal closed-ended funds in which the units remain unchanged are generally not taxed as their open ended cousins.
The bottom line? Capital Gains are not just for the wealthy, or those selling their family's art at Christies, everyday people just like you and me have to watch out as well.
(P.S. Here's hoping my mint condition Duck Tales action figures are worth something soon!)
Benjamin Goldburd is an Associate at Goldburd McCone LLP a boutique tax law firm in New York City.
For more information on these and other tax issues feel free to contact our offices at 212-302-9400, or on the web at:http://www.goldburdmccone.com