Turbulent economic times might make your wealthy clients think about collectible items that others will treasure and pay for. These holdings come with hefty taxes, however, and investing in them requires planning.

The Taxpayer Relief Act of 1997 lowered the capital gains rate on most assets but left the maximum rate on the sale of collectibles at 28%. The IRS list of collectibles that fall under this higher rate is slightly unclear, but the agency's list includes art, rugs or antiques, metal or gems (with some exceptions), stamps or coins (again with limited exceptions), alcoholic beverages and other tangible property.

“The IRS left itself enormous flexibility in being able to specify ‘any other tangible property’ as a collectible,” said Jacqueline Valouch, head of philanthropy for Deutsche Bank Wealth Management in New York. She added that assets that can fall under this “other” category include antique cars, books, sports cards and jewelry, among other items. 

“The idea of a collectible is any tangible item that demands a higher price because of a value,” said Michael H. Karu, CPA and partner at Levine, Jacobs & Co. in Livingston, N.J. “One ounce of gold bullion will have a spot price. If that one ounce is a gold coin, the value will change based on a variety of factors, such as rarity and condition.”

“We’re typically not advising clients to purchase collectibles and gold as an asset class. There’s much they don’t understand about those items,” said Bruce Primeau, a CPA at Summit Wealth Advocates in Prior Lake, Minn. “There’s a material cost [or] commission built into the purchase price as well as the sale price. Any gain realized above those and clients have to pay a 28% federal tax, as well as potentially a material state tax.”

“Most high-net-worth clients ... don’t understand that the income taxation of collectibles depends on the taxpayer’s status as dealer, collector, investor or creator,” added Jere Doyle, senior vice president and estate planning strategist at BNY Mellon Wealth Management. Generally, he said, a deal or creator will have ordinary income tax and an investor or collector may receive long-term capital gain tax treatment.

“There’s always the danger that the IRS could deem something to be a collectible based on rarity,” added Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn.

Precious metals are another attractive investment in troubled times. Amid the global pandemic, gold recently posted its biggest weekly gain since 2008, even as mining and refining industries shuttered to contain the outbreak.

Gold is taxed at 28%, Armstrong said. “Especially when an exchange-traded fund [of precious metals] is involved, many people fail to realize that it is the underlying holding that’s the collectible” and incurs the higher tax, he said.

Precious metal mutual funds or ETFs “can be globally diversified and may offer better protection against a downturn in one or two metals,” Primeau said.

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