How to Avoid Capital Gains Tax on Collectibles

Collecting is a pastime to which a great many people are drawn. The satisfaction of having a complete set of old stamps or unearthing a rare bottle of wine is quite easy to understand. However, a less easy-to-understand aspect of collecting is how the purchase and sale of collectibles can affect your taxes. If you sell a collectible for a profit, you may, under certain circumstances, be subject to some pretty hefty taxes on that income. Avoiding these more punishing capital gains taxes is possible if you understand the rules that govern when and how they’re levied.

If you need help with tax planning, a financial advisor can guide you in optimizing your financial plan to lower your tax liability.

What Is Capital Gains Tax?

A capital gain (or loss), put as simply as possible, is the difference between what you paid for a capital asset and what you sell it for. A capital asset can be just about anything you own: your house, Netflix stock, a painting by Van Gogh, etc. When you receive a capital gain via the sale of a capital asset, that money is taxed differently than income you earn from an employer, for instance.

If you owned the capital asset for longer than one year, any capital gain you received will be subject to the long-term capital gains tax. Short-term capital gains, or gains from the sale of assets that you owned for a year or less, are subject to ordinary income tax. Capital gains taxes have something of a reputation for being lower than the standard income tax rate of those who often take advantage of it. This is due to the Taxpayer Relief Act of 1997, which decreased the maximum tax rate of many capital gains from 28% to 20%. However, this decrease didn’t and doesn’t apply to collectibles, as the IRS still levies a 28% tax on these specific long-term capital gains.

The one-year timeline is determined by counting from “the day after the day you acquired the asset up to and including the day you disposed of the asset,” according to the IRS website. This divide between short-term and long-term capital gains gets a bit more complicated in situations where you didn’t purchase the capital asset that’s generating the gain. Perhaps you inherited a piece of art, or someone gifted it to you. In the case of inheritance, any capital gain will be considered a long-term capital gain in the eyes of the IRS. If the asset was a gift, then the time that the gifter owned the asset will be included in the timekeeping.

What Is a Collectible?

When it comes to investing, the IRS treats collectibles differently from traditional assets like stocks or bonds. Collectibles include tangible items that often appreciate in value over time, but they also come with unique tax rules that can catch investors off guard. Understanding what qualifies as a collectible is the first step toward managing your tax liability and maximizing your investment returns. Here are the main categories the IRS considers collectibles.

Artwork: Paintings, sculptures, drawings and other fine art pieces fall squarely under the IRS’s definition of collectibles. Because art can appreciate significantly over time, it’s often used as an alternative investment, but selling it at a profit can trigger higher capital gains tax rates. Proper documentation and appraisals are crucial to determine fair market value and tax exposure.
Precious metals and gems: Gold, silver, platinum, palladium and certain gemstones like diamonds or emeralds are all considered collectibles when held in physical form. While these assets can serve as a hedge against inflation, gains from their sale are taxed at a maximum rate of 28%, higher than most long-term capital gains. Investors looking to minimize taxes may consider holding precious metals through specific financial products that qualify for different treatment.
Coins and stamps: Rare or commemorative coins and collectible stamps are also subject to the IRS’s collectible tax rules. Even though some coins are made of precious metals, their value as collectibles depends on rarity and condition rather than metal content alone. Proper recordkeeping and authentication are essential for determining value and ensuring compliance with tax regulations.
Antiques and memorabilia: Furniture, historical artifacts, sports memorabilia and even vintage wines can all qualify as collectibles. Their worth often depends on condition, provenance and demand within niche markets. Since these items can fluctuate in value, investors should work with professionals to appraise and manage them correctly to avoid unnecessary tax complications.
Other tangible assets: The IRS definition is broad enough to include other physical items held primarily for personal enjoyment or appreciation potential, from classic cars to rare books or musical instruments. While these can be valuable additions to an investment portfolio, they also carry higher tax exposure and storage or maintenance costs.

Understanding what qualifies as a collectible is key to managing both risk and reward. Because these assets are taxed differently than traditional investments, strategic planning can help reduce your tax burden when it’s time to sell. A financial advisor or tax professional can help you determine how collectibles fit into your overall investment strategy, and how to protect more of your profits from capital gains taxes.

How to Calculate Capital Gains Tax on Collectibles

SmartAsset: How to Avoid Capital Gains Tax on Collectibles

To calculate the amount of tax you owe on a capital gain, you’ll need to first calculate what’s called your adjusted basis. In cases where you purchased the asset, the adjusted basis is the price that you paid, plus any additional transactional fees and any money you’ve spent on restoration or repair. So if you buy a first edition copy of Edmund Spenser’s The Faerie Queene for $1,200, and you also pay a $90 broker fee as well as $200 to help preserve it, your adjusted basis for the asset would be $1,490.

If, however, you received the asset without buying it, say as a gift or by inheriting it, then your basis will be determined instead by calculating the fair market value of the collectible. For certain collectibles, this may be simple enough to determine, especially if the item or items like it are bought and sold with some regularity. If that’s not the case, it may be necessary for an expert to perform an appraisal on the asset to come to an estimate.

How to Avoid Capital Gains Tax on Collectibles

The surefire way to avoid paying any sort of taxes on your collectibles is, of course, to not sell them. Beyond the obvious and perhaps silly answers, there are a few strategies that can help keep your tax bill down.

First, sell the asset within a year so that the sale qualifies as a short-term capital gain. Short-term gains are taxed as ordinary income, so if your standard income tax rate is lower than 28%, then your tax burden would be lower.

One other approach is, rather than selling the collectible, donating it to a qualified charity. With this route, you’ll receive a charitable-giving related tax deduction rather than a capital gain. The exact amount of the deduction will vary depending on what the qualified charity does with your collectible. If the charity plans to use the collectible in their work, your deduction could be as high as the fair market value of the collectible.

Another approach that isn’t specific to collectibles but is often used by those who encounter plenty of capital gains and losses is to be thoughtful about when to “realize” the capital gain. You only owe taxes on a capital gain when you sell the underlying capital asset, and crucially, the capital gains taxes you owe in a given year can be reduced by any capital losses you also encountered.

So, you can time the sale of a particular collectible such that the taxes on the resulting capital gain are offset by capital losses you’ve already encountered that year or expect to encounter later in the year.

Bottom Line

The rules surrounding the taxation of collectibles, whether those are antique violins, rare books, vintage jewelry or the baseball that Aaron Judge hit to get his 62nd home run of the season, are complex and in some respects deliberately vague. The difficulties are on both sides of any deal on collectibles, buying and selling. However, there are still strategies you can implement to minimize how much profit you lose to taxes.

Tips for Tax Planning

A financial advisor can walk you through different tax strategies to minimize your liabilities. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re looking for a tax strategy, tax-loss harvesting can help you use your investment losses to lower your taxes on capital gains. Here’s how it works.