Collectibles

March 13, 2024

7714 / When a collectible is sold, how is the transaction taxed?

<div class="Section1"> Except for tax rates applied to a taxable gain, no special tax rules apply to sales of collectibles held for investment. Therefore, to the extent that the selling price received exceeds the individual’s tax basis (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="692">692</a>) in the collectible, taxable gain must be reported; if the individual’s basis in the collectible exceeds the selling price, a loss may be reported from the transaction (still assuming, that is, that the collectible was “held for investment”).<a href="#_ftn1" name="_ftnref1">1</a> Collectibles gain (i.e., gain on the sale or exchange of a collectible that is a capital asset held for more than one year – see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a>) is subject to separate treatment from other capital gains and losses, which generally results in its being subject to a capital gain rate less favorable than the generally applicable rate, but more favorable than the rate for ordinary income.<a href="#_ftn2" name="_ftnref2">2</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="698">698</a> for the definition of capital asset. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for the tax treatment of capital gains and losses. If the entire purchase price for the collectible is received in the taxable year of sale, the gain (or loss) must be reported on that year’s income tax return; otherwise, the installment sale rules will apply. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="667">667</a>. Beginning in 2013, the net capital gain may also be subject to the 3.8 percent tax on “net investment income” (known as the NIIT), as defined in IRC Section 1441, depending upon the taxpayer’s modified adjusted income.<a href="#_ftn3" name="_ftnref3">3</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 1001. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 1(h). <a href="#_ftnref3" name="_ftn3">3</a>.  The tax on net investment income was not impacted by the 2017 tax reform legislation. </div></div>

March 13, 2024

7713 / What is a collectible?

<div class="Section1"> In the broad sense, a “collectible” is any item of property that derives its value directly from its rarity and popularity. An item’s history, condition, composition, artistic and aesthetic qualities, and the number of similar items in existence may each play a part in determining the value of a particular collectible. However, the presence or absence of a ready market where the item may be traded will have a great deal to do with whether a particular class of property is an investment quality collectible. Common investment quality collectibles include rare coins and currencies, works of art, metal or gems, and stamps. Oriental rugs, antiques, and certain alcoholic beverages (rare wines) are also often held as investments.<a href="#_ftn1" name="_ftnref1">1</a> However, it is important to note that many collectibles may not be purchasable in an IRA, or qualified plan. However, certain precious metals are exempt from the broad qualified and IRA prohibition against the purchase of collectibles. Coins There are two types of coins held for investment purposes. Numismatic coins (such as the United States $20 gold pieces circulating pre-1934) derive their value from qualities, such as condition and number minted, which make them rare; metal content is only one of many elements contributing to the value of such numismatic (or rare) coins. On the other hand, bullion-type coins (such as the Canadian Maple Leaf, the Mexican Peso, and the Austrian Corona) derive their value solely from their metal content (although a striking premium may also be added into the market value); they represent investments in the world gold or silver markets rather than in the coins themselves.<a href="#_ftn2" name="_ftnref2">2</a> In either case, however, the coins should generally be treated as “collectibles” for tax law purposes, in the same way that a gemstone, stamp, artwork or a vintage wine is a collectible. Even if a bullion-type coin is not a “coin” within the meaning of IRC Section 408(m)(2)(D), it ought to fall within the category of “any metal or gem” under IRC Section 408(m)(2)(C). However, the IRC exempts certain coins issued by the United States or an American state from the definition of “collectible,” such as gold coins issued by the U.S. and real silver dollars of the “old-fashioned type.”<a href="#_ftn3" name="_ftnref3">3</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 408(m). <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 79-143, 1979-1 CB 264. <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 408(m)(3), cross-referencing, inter alia, 26 USC § 5112(a)(7)-(9); 26 USC § 5112(e)). </div>

March 13, 2024

7716 / How is an individual taxed if, instead of selling the collectible, it is exchanged for other property?

<div class="Section1"> Editor’s Note: For tax years beginning after 2017, “like-kind” exchange treatment under IRC Section 1031 is only permitted with respect to exchanges of real property. The rules below outline the post-2017 like-kind exchange rules. For tax years after 2017, such an exchange results in a taxable event under federal and state income tax law, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7715">7715</a> for pre-2018 income tax rules applicable to such exchanges. If an individual exchanges a collectible held as an investment for (1) another collectible of a different kind or class, or (2) other property that is not a collectible, the individual will recognize a taxable gain (or loss) to the extent that the sum of the fair market value of the property and money (if any) received in the transaction is greater (or less) than the tax basis in the collectible transferred.<a href="#_ftn1" name="_ftnref1">1</a> Normally, this will be a capital gain or loss. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="698">698</a>. A capital gain or loss will be short-term or long-term depending on how long the transferred collectible had been owned. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="699">699</a>. Collectibles gain (i.e., gain on the sale or exchange of a collectible that is a capital asset held for more than one year) is subject to separate treatment from other capital gains and losses, which generally results in its being subject to a capital gain tax rate that is less favorable than the generally applicable rate, but more favorable than the ordinary income tax rate.<a href="#_ftn2" name="_ftnref2">2</a> For the tax treatment of capital gains and losses, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a>. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 1001. <a href="#_ftnref2" name="_ftn2">2</a>.  See IRC § 1(h). </div></div>

March 13, 2024

7718 / What are the gift and estate tax consequences of precious metals investments?

<div class="Section1"> As collectibles, precious metals are capital assets, and treated like any other capital asset for purposes of making gifts (and determining the associated gift and estate tax treatment under federal transfer tax rates that are as high as 40 percent in 2013 and beyond). States may also impose gift, estate, or inheritance tax on such assets. As of 2024, 17 states, plus the District of Columbia, still impose an estate and/or inheritance tax.<a href="#_ftn1" name="_ftnref1">1</a> Most state exemptions are lower than the current $13.61 million federal estate tax exclusion effective in 2024,<a href="#_ftn2" name="_ftnref2">2</a> and a number of states have indicated that they will not raise state-level exemptions to match the currently high federal exemption.<a href="#_ftn3" name="_ftnref3">3</a> Financial planning needs to take both applicable federal and state law into account. <hr /> Planning Point: The American Taxpayer Relief Act increased the top estate and gift tax rate to 40 percent from 35 percent for estates beginning in 2013. However, for 2024 the lifetime gift and estate tax exclusion for estates increased to $13.61 million (as adjusted annually for inflation). Therefore, state estate and inheritance taxes are increasingly more important and need to be considered for planning purposes, although only about 19 states still impose one or the other or both. <hr /> In general, for current gift and estate tax purposes the fair market value of the asset at the time of the gift transaction or at death is usually used. <hr /> Planning Point: The stabilization of the federal gift and estate tax regime restores the clear need for the use of life insurance to cover the taxation of collectibles and other hard assets, like real estate. These types of assets often have significant value but may be difficult to liquidate in a timely fashion to maximize that value and still allow the estate to pay the required estate taxes in the required time frames. <hr /> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See generally for more updated information, www.TaxFoundation.org. According to the site, only Maryland imposes both taxes. <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Proc. 2023-34. <a href="#_ftnref3" name="_ftn3">3</a>. Op. cite, Footnote 1. </div>

March 13, 2024

7715 / How is an individual taxed if, instead of selling the collectible, it was exchanged for other property in a “like-kind” exchange prior to 2018?

<div class="Section1"> Editor’s Note: For tax years beginning after 2017, “like-kind” exchange treatment under IRC Section 1031 is only permitted with respect to exchanges of real property. The rules below outline the pre-2018 like-kind exchange rules. For tax years after 2017, such an exchange results in a taxable event under federal and state income tax law, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7714">7714</a> for current income tax rules applicable to such exchanges. This dramatically reduces the opportunity for nontaxable exchanges of collectible of a like-kind. If the collectible was exchanged solely for another collectible (or collectibles) of the same nature or character, the transaction would generally receive nonrecognition treatment, subject to the rules for like-kind exchanges under IRC Section 1031. Thus, the exchange of numismatic coins for other numismatic coins or stamps for stamps would generally qualify as a like-kind exchange. For an explanation of like-kind exchanges and the effect of giving or receiving money or other property in connection with an otherwise valid like-kind exchange, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="710">710</a>. In the case of coins, the exchange of a “numismatic” coin for a bullion-type coin was not a like-kind exchange.<a href="#_ftn1" name="_ftnref1">1</a> (See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7713">7713</a> for more examples of like-kind exchanges under IRC Section 1031.) Surprisingly, there are no clear rulings or case authority as to whether the exchange of a numismatic coin for another numismatic coin qualified as a like-kind exchange. However, the 1991 proposed regulations would appear to support the idea of like-kind exchange treatment under the rules applicable to artwork and other collectibles. <hr> Planning Point: Note that what is a “numismatic” coin is not entirely clear so care should be taken that both the relinquished coin and the replacement coin are both considered “numismatic” in order to be like-kind and qualify for the 1031 tax-free exchange tax treatment. This advice now only applies to exchanges that occurred pre-2018. <hr> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  See e.g., Rev. Rul. 79-143, 1979-1 CB 264. </div></div>

March 13, 2024

7717 / Is a “rare” coin or currency money or “property”? How will it be valued when it is used in a taxable transaction?

<div class="Section1"> Rare (numismatic) coins or currencies that have been removed from circulation and coins or currencies in circulation that have a numismatic value in excess of face value are “property other than money” for purposes of the federal income tax.<a href="#_ftn1" name="_ftnref1">1</a> As “property other than money,” a rare coin or currency will be valued at its fair market value (FMV) rather than face value when it is used in a taxable transaction. Thus, where a taxpayer “sold” real property with a tax basis of $2,000 for silver coins having a face value of $2,000 and a FMV of $6,000, the taxpayer realized a $4,000 taxable gain in the transaction.<a href="#_ftn2" name="_ftnref2">2</a> Similarly, a dividend paid to a taxpayer in U.S. Double Eagle $20 gold coins having a total face value of $5,500 had to be reported as $70,396 of dividend income.<a href="#_ftn3" name="_ftnref3">3</a> Also, an individual who receives compensation for services rendered in the form of rare but circulating coins or currencies that have a FMV in excess of their face value must include the higher FMV in income.<a href="#_ftn4" name="_ftnref4">4</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See California Fed. Life Ins. Co. v. Comm., 76 TC 107 (1981), aff’d, 680 F.2d 85 (9th Cir. 1982); Joslin v. U.S., 666 F.2d 1306 (10th Cir. 1981); Lary v. Comm., TC Memo 1987-169, aff’d, 842 F.2d 296 (11th Cir. 1988). <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 76-249, 1976-2 CB 21. <a href="#_ftnref3" name="_ftn3">3</a>. Cordner v. U.S., 671 F.2d 367 (9th Cir. 1981). <a href="#_ftnref4" name="_ftn4">4</a>. Joslin v. U.S., 666 F.2d 1306 (10th Cir. 1981). </div>

March 13, 2024

7719 / What are the dealer reporting requirements on purchase or sale with regard to a precious metals investment?

<div class="Section1"> Purchase: There are currently no dealer reporting requirements to the IRS (or any governmental agency) upon the purchase of any precious metal investment in any quantity at the date of this edition, unless the purchase is made with cash totaling more than $10,000 in any 12-month period. In such cases where the cash amount does exceed $10,000 in any 12-month period, the dealer is required to complete and file IRS Form 8300. The IRS is wary and looking for techniques seeking to break apart a single cash purchase to avoid such reporting.<a href="#_ftn1" name="_ftnref1">1</a> Sale: The IRS is more interested in information reporting when precious metals are sold than purchased. A sale of a precious metal may require a report by the dealer on IRS Form 1099B. The rules governing dealer reporting for Form 1099B purposes are currently hard to locate, since much of the information is contained in trading contract rules created and maintained by the Commodities Futures Trading Commission (CFTC) that are less than clear and may be confusing to some. In general, a dealer must complete Form 1099B for the IRS if an investor sells silver, gold, platinum or palladium in a contract form that the CTFC has approved for trading and it otherwise satisfies the minimum requirements for such a contract. All transactions occurring within a 24 hour window are considered a single sale for purposes of these reporting rules. The current Instructions to Form 1099B express this as follows: “A sale of a precious metal (gold, silver, platinum, or palladium) in any form for which the Commodities Futures Trading Commission (CFTC) has not approved trading by regulated futures contract (RFC) is not reportable. Further, even if the sale of a precious metal in a form for which the CFTC has approved trading by RFC, the sale is not reportable if the quantity, by weight or by number of items, is less than the minimum required quantity to satisfy a CFTC-approved RFC. For example a broker selling a single gold coin does not need to file a Form 1099B even if the coin is of such a form and quantity that it could be delivered to satisfy a CFTC-approved RFC if all the CFTC-approved contracts for gold coins currently call for delivery of at least 25 coins. Sales of precious metals for a single customer during a 24 hour period must be aggregated and treated as a single sale to determine if this exception applies. This exception does not apply if the broker knows or has reason to know that a customer, either alone or with a related person, is engaging in sales to avoid information reporting.” (Emphasis added)<a href="#_ftn2" name="_ftnref2">2</a> These instructions do not specify which coins are reportable, but it would appear that the following coins are covered: South African Krugerrands, Canadian Maple Leaf gold coins, Mexican gold 50-peso coins, and U.S. 90 percent pre-1965 silver dollars, half dollars and dimes, but not quarter dollars. Modern U.S. bullion coins are not on the list. These coins are reportable if they are in the minimum qualities under a CFTC-approved RFC. CFTC-approved “bulk gold contracts” require a minimum of 1 kilogram at a fineness of .995 or better. Under this rule, gold and silver coins would apparently be reportable to the IRS if sold in the following quantities: <ul> <li>U.S. 90 per cent silver coins – $1,000 face value</li> <li>Canadian Maple Leaf gold 1oz coin – 25 coins</li> <li>Mexican 50-Peso ‘Onzas’ gold coin – 25 coins</li> <li>South African Krugerrand gold – 25 coins</li> </ul> This rule means that gold bars weighing 1 kilo (or smaller bars adding up to 1 kilogram or more) are also reportable.<a href="#_ftn3" name="_ftnref3">3</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See Instructions for Form 8300, at https://www.irs.gov/businesses/small-businesses-self-employed/irs-form-8300-reference-guide. <a href="#_ftnref2" name="_ftn2">2</a>. See Instructions for Form 1099-B (2023), at www.IRS.gov/instructions/i1099b. <a href="#_ftnref3" name="_ftn3">3</a>. For an excellent brief article by an attorney on this confusing area, see generally, Armen Vartian, What coins are “reportable,” Sept. 7, 2012 at www.coinworld.com. </div>