12 tax tips for collectors

Today's collectors hoard all sorts of objets d'art -- including Wheaties boxes, teacups, beer cans and the ever-popular all-American favorite -- baseball cards.

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Empowered by popular programs such as "Antiques Roadshow" and auction sites such as eBay, collectors scour the world for the perfect piece of Depression glass or antique silver.

But owning collectibles raises questions pertaining to taxes that can lead to special circumstances, judgment calls and gray areas. Here are some tips and issues to keep in mind:

1. Sell an item, pay taxes
Collectors have a silent partner they may not have recognized: the IRS. When collectors sell something they've owned for more than a year, they pay long-term capital gains taxes -- either 15 or 28 percent -- on any profits they've made. If they hold it less than a year, they pay regular income tax on the profits.

That means if you bought that collectible oil painting for $1,000 five years ago and sell it for $2,000, you owe Uncle Sam a tidy $280.

In real life, even black and white examples are hardly ever black and white. If you had that painting appraised before you sold it -- a smart move, by the way -- you can subtract the appraisal fee from your profits. If the painting was older and you had some restoration work done, you can subtract that, too.

And if your income tax bracket is below 28 percent, you'll pay at your income tax rate rather than a higher capital gains rate, says Patricia A. Thompson, CPA, tax partner for the Providence-based firm of Piccerelli Gilstein & Company, LLP.

2. Define "collectibles"
So what difference does it make whether the government considers something a collectible? For collectibles, the long-term capital gains tax rate is 28 percent. For non-collectibles, it's 15 percent.

The IRS has a list of what is considered a collectible. It includes: works of art, antiques, rugs, gems, metals, stamps, coins and alcoholic beverages. Sound simple? Not so fast. The rules allow the government to convey collectible status on other personal items not specifically listed.

And not every item on the list is automatically a collectible, says Donald P. Musgnug, CPA, partner with New York-based Fuoco Peare & Heller. Cases in point: your 5-year-old's artwork or that pop-top bottle of Cabernet.

So how do you know if your item is a collectible? There is no instant answer. Best bet: Take an honest look at the way you treat the object. Do you serve meals on that 200-year-old dining room table or is it stashed in the attic under a special cloth?

Are you keeping an old car because you expect it to increase in value? That alone might be a pretty good indication that it's a collectible, because autos usually decrease in value.

If your auto is an antique, it's probably a collectible, says Thompson. Another litmus test: Do you have it insured as an antique? "Part of it is what you've decided it is," she says.

3. Realize that sometimes collectible status is moot
If you sell that collection of celebrity toothpicks for what you paid it doesn't matter if the item is collectible or not. There's no profit, so capital gains is not an issue.

If you take a loss when you sell, even if you're only a casual collector, you can claim a capital loss of up to $3,000, says Musgnug.

4. Study the business of collecting, as well as the collectibles
"Be aware that, as a collector or investor, if you manage your business and understand [it], you can generate potential tax savings or offset your costs," says John "Jack" Kelly, co-author of "A Business & Tax Guide for Antiques & Collectibles."

"But don't go into collecting totally blind without understanding that."

5. Know the value of your items
Before you buy or sell, you need to have a good idea of what your goods are worth and why.

Read, talk to people in the field, especially dealers and auctioneers, and cruise the online auction sites to learn what's out there and how much it's bringing. Thanks to the Internet, consumers are finding that some collectibles aren't as rare as they thought.

"EBay has made it much easier for people to get rid of stuff," says Kathy Kelly, CPA, co-author of "A Business & Tax Guide for Antiques & Collectibles."

"And over the next 10 years we'll start to find out the true value of things."

And remember appraisals are only opinions, says Gilbert Edelson, administrative vice president of the Art Dealers Association of America. "An appraisal is basically a ballpark," he says. "You don't know how much you're going to get for it until you put it up for sale."

6. Define your role
Are you a collector or an investor? While a collector amasses for enjoyment, an investor is usually just looking at making a profit and would likely treat the goods differently.