Collectibles and Tax

According to our much bloated tax codes, investment in collectibles fall under the category of capital gains. But the capital gain from the sale of collectibles is not the same as capital gains from stock investments, such as the much ballyhooed 11% tax rate that Mitt Romney paid last year on his investment income. Officially, the tax rate for stock dividends is 15%.

Collectibles are currently subject to one of the highest rates of federal taxation in the United States. There are two tax rates for collectibles: short-term and long-term. Short-term collectible investments, i.e. owning a collectible for under one year, are taxed as short-term capital gains at your ordinary income tax rate. So that could be as high as 35%. Long-term collectible investments, i.e. over one year, are taxed at a flat 28%.

That is ridiculously high considering that large investment banks are making billions, but the tax codes have loopholes for them to pay even less than the 15% that they should pay. Collectors who have precious art, or posters, or movie props have to abide by strict tax laws that mandate a much higher rate. Is this fair? I know tax is a sore subject in today’s political and economic atmosphere, even more so because it’s an election year.

However, let me posit this argument: a 28% tax rate on entertainment collectibles could be holding the collectibles industry back. Consider that before the Debbie Reynolds auction, there were few, if any, movie memorabilia that had sold for $1M or more. It took a series of perfect storms and all the stars to align for the Debbie Reynolds Auction to achieve what it did in sales total. Prices came back down to more typical levels at the second Debbie Reynolds Auction a few months later.

Of course, the counter argument is to point at the giant fine art market where works of art by Picasso or any of the Impressionists would routinely sell for tens and even hundreds of millions of dollars. But I would further point out that the majority of those buyers are not American. (Admittedly, I do not know what the tax laws governing collectibles in other countries are compared to the U.S.)

I would love to hear from a tax expert on this topic or from anyone, really, with insight into this matter. What about collectors? How do you feel about the taxes on your collection? More specifically, how did you approach the tax deadline earlier this week in regards to reporting any capital gains from the sales of your collectibles?