Troy K. Lewis, CPA, CGMA; Brian C. Spilker, CPA (inactive), Ph.D.; and Kamri S. Call, have published their article, The Taxation of Collectibles in The AICPA Tax Adviser (Nov. 1, 2019). The Abstract is as follows:
The tax rate on collectibles is 28%, higher than on other capital gains. Find out what property is defined as a collectible, how gains and losses are netted, and practical strategies that taxpayers can use to lessen the impact of the higher rate.
The executive summary is as follows:
- The Taxpayer Relief Act of 1997, while lowering the maximum capital gains rate on gains from the sale of most assets to 20%, left the maximum rate on gains from the sale of collectibles at 28%.
- The types of assets that are collectibles are listed in Sec. 408(m) and proposed regulations. However, the IRS has the authority to specify “any other tangible property” as a collectible for these purposes.
- Collectible gains also include gains, but not losses, from the sale of an equity interest in a passthrough entity to the extent the gain from the sale is attributable to unrealized appreciation in collectibles owned by the passthrough entity.
- Special netting rules apply in determining the amount of collectibles gain for a tax year.
- In certain situations, involving the phaseout of the alternative minimum tax exemption or the Sec. 199A deduction, the marginal rate on collectible gains can exceed 28%.
- Due to the higher tax rate on gains from the sale of collectibles, practitioners and taxpayers should consider a number of strategies that can reduce the amount of collectibles gains, including structuring a sale of a collectible to recognize gain over multiple years.
The federal income taxation of gains (and losses) from the disposition of investments in collectible assets (collectibles) is relatively unfamiliar to many practitioners for several reasons. First, the tax definition of collectibles is complex and can easily be misinterpreted. Second, the netting process for collectible gains and losses is more complicated than it is for typical capital gains and losses. Finally, the applicable tax rate for net collectible gains is different than for other capital gains and losses. This article assists tax practitioners in understanding the definition of collectibles for tax purposes, explains how gains from collectibles are taxed, and provides practical strategies that taxpayers can use to lower their tax burdens on collectible gains.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal..