Illustration by Sebastien Thibault
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The riveting prizes of trading cards, action figures, and other collectibles lately are enough to make anyone rummage through old collections in search of treasure. In recent months, a 1979 Wayne Gretzky rookie card sold for $ 1.79 million in December, while a Mickey Mantle rookie card grossed $ 5.2 million.
While in-person auctions and gallery sales have declined over the past year, online collectibles sales have exploded, thanks in part to the switch to digital channels by large auction houses. Trading card sales in the US increased 142% and sales outside the US increased 162% last year, according to eBay. Sotheby’s reports a 30% increase in online auction sales.
The craze for collecting has also branched into digital ownership, where the values of non-fungible tokens (NFTs) – unique digital photos, works of art, videos, or audio clips – have skyrocketed.
But with big profits comes the inevitable: taxes that can seriously affect collectibles. A number of experts weighed what collectors need to know.
Temporary change in tax regulations
The Tax Cuts and Jobs Act eliminated some long-standing advantages of being an investor in collectibles as opposed to being a hobbyist. While tax rates on long-term capital gains are the same for all collectors – 28% versus 20% for gains on stocks and bonds – investors have traditionally been able to deduct losses and expenses related to maintaining a collection. Art Exchanges, which means swapping a collectible for a similar one without raising taxes.
But the tax law forbade deductible expenses and the exchange of similar types of collectibles. Investors can only deduct losses. Hobbyists have no tax breaks.
To be considered an investor, it must be demonstrated that the primary reason for holding a collectible is for profit.
“Instead of hanging your collector’s painting on the wall, store it. Keep a record, ”said David Holland, founder and CEO of Holland Financial, a consulting firm in Ormond Beach, Florida.
Investors should also be aware of the tax implications of using digital currency to make purchases, says Jere Doyle, estate planning strategist at BNY Mellon Wealth Management in Boston. The difference between the dollar value of the digital currency when it was purchased and the value when it was used is subject to capital gains tax.
The highest long-term capital gain rate for cryptocurrencies is the same as for securities, 20%. Gains from currencies held for less than a year are considered short-term and are taxed at income tax rates.
Update estate plans
The past year has highlighted the need for detailed estate plans for collectibles, says Kevin Duncan, director of estate administration at Fiduciary Trust. “To get an expert opinion you have to be there,” says Duncan. The pandemic made this a challenge.
Duncan adds that inheritance tax must be paid within nine months of death. The delays were exacerbated by families whose estate plans were either out of date or lacking relevant information.
“If collectibles are a significant portion of the estate, you may have to sell parts to pay the tax, and that can take time,” says Duncan.
Tax strategies & complications
Consultants often recommend strategies to defer capital gains tax, such as installment sales or qualified investments in opportunity zones. Some people choose not to sell in their lifetime. But President Biden’s plan to subject profits of $ 1 million or more to income tax rates of up to 39.6% turns planning on its head.
“If you’re putting off profits, is that wise?” says Jack Nuckolls, Managing Director, Private Client Services at BDO, an accounting firm based in Chicago. “You could be taxed with state taxes at 40% or more, or sell now and taxed at 28%,” he says.
This article appeared in the June 2021 issue of Penta magazine