Read the article and write a one page document/paper answering the following questions: (in paragraph form).1. What are the details in the article? Please summarize the facts.2. What are your thoughts on the subject matter?3. In your opinion should the tax rate get dropped to the passive income rates of 15 to 20% and if so would this encourage you to invest in collectibles?The capital gains tax on the sale of a collectible is a flat 28%. Provided you hold the piecefor more than one year you won’t pay more than that amount — even if you’re in a high taxbracket. The level of tax is high but it’s advantageous for those in the higher tax brackets.(For more see: A Primer on U.S. Tax Rates.)The tax rate is set at such a high level because the government isn’t a big fan of the buyingand selling of collectibles. Unlike business innovations or comprehensive employee training collectibles aren’t real economic drivers. In short the government would prefer capital beput toward efforts that help grow gross domestic product. (For more see:The 5 IndustriesDriving the U.S Economy.)However all of this is irrelevant if you’re someone who wants to sell a collectible and wantsto know about all the tax rules. You already know the capital gains tax on the sale of acollectible but there’s more to the story. (For more see: Contemplating CollectibleInvestments.)What is a Collectible?Providing the answer to this question won’t get us very far since it’s simply “an item worthcollecting.” A list of examples will give you a much better idea:Rare stampsRare coinsRare booksArtBaseball cardsGlasswareAntiquesFine wineThis list goes on and on but you get the idea. (For more see: 6 Major Collectibles Payoffs.)What Is Your Basis?When figuring out your tax obligation for selling a collectible you need to figure out yourbasis. In order to do this you can use this simple formula: Cost of item auction and broker fees = basis. For “cost of item” you can include maintenance and restoration costs. (Formore see: How to Cash in Your Heirlooms.)If you inherited a collectible then the basis is the fair market value of the item at the time ofinheritance which should be based on an appraisal. If the collectible has not beenappraised the fair market value also can be determined by comps (i.e. the price of similaritems). The problem with using comps is it doesn’t take into account the condition of yourcollectible or the collectible being used for comparison. (For more see: Should You InsureYour Collectibles?)Once you establish your basis subtract the basis from the sale price and you will have yourcapital gain.For example let’s say you inherited an antique table. The fair market value at the time ofinheritance was $5 000. You put $1 000 into it for restoration which you hoped would helpincrease its value. Fortunately you were correct and you sold the table for $7 500. Youhave a gross profit of $1 500. Your capital gain obligation at 28% is $420. After taxes youhave $1 500 $420 = $1 080 in net profit. (For related reading see: The EasiestInvestments Ever Made.)Important Notes1. If you sell a collectible in less than one year it will be taxed as ordinary income.2. If you buy and sell gold or silver or gold and silver exchangetraded funds it will be taxedas a collectible (since gold and silver are considered collectibles). This is important to noteso you’re not surprised in the future. (For more see: The Top 3 Silver ETFs.)3. Stick to your circle of competence. In other words if you know everything about rarestamps and nothing about art you should never put capital in art. The only exception forgoing out of your comfort zone is in the public markets where a lot of information isavailable to help form an investment opinion; this type of information isn’t available in themajority of the collectibles market. (For more see: 6 Things You Shouldn’t Sell at a GarageSale.)4. If you use a collectible for personal use (hanging a painting on a wall in your home asopposed to keeping it in storage) then you will not be able to claim a capital loss. (Formore see: Fine Art Can Be a Fine Investment.)The Bottom LineThe sale of collectibles can lead to a cash windfall but the tax obligation will be high formost people. If you’re still not 100% sure or comfortable about the sale of a collectible (or collectibles) and you want to minimize your tax obligation hire a tax advisor. (For more see: Introduction to Investment Diversification.)Read more: How Are Collectibles Taxed? http://www.investopedia.com/articles/personalfinance/061715/howarecollectiblestaxed.asp#ixzz3l4sBjeKVFollow us: Investopedia on Facebook
