Income & Capital Gains

Trusts

There are a number of forms of trusts that can be used to help minimize your estate taxes including the use of AB trusts, QTIP trusts, charitable trusts, and ILITS. These trusts all accomplish essentially the same thing: removing assets from your personal estate.

Capital Gains Taxes

Capital gains taxes are the taxes levied against the profit you make on selling certain items of property called capital assets such as stocks, bonds, collectibles, etc. In general, you are taxed on the amount that you sell the item for that is over and above the amount you bought it for (also referred to as your basis) i.e. you are taxed on your profit from the sale. In calculating your basis, you also have to consider fees that may have been paid when you acquired the coins such as auction or broker fees.

The capital gains tax rates are much more favorable than your normal tax rates and for most property the maximum capital tax rate is 15%. Collectibles including coins, however, for various reasons, are not eligible for the tax rate of 15% and are instead subject to a capital gains tax rate of 28% thus not eligible for the most favored capital tax rates.

One note to remember, as a collector, your coins are considered capital assets, but if you are in the business of buying and selling coins, then they are considered business property and inventory and are not eligible for the capital gains rates and are tax at the normal tax rates.
Calculating Capital Gains Tax on the Sale of a Collectible

This is a another great explanation one of the top accounting firms in the San Francisco Bay Area, Greenstein, Rogoff, Olsen & Co.

"Uncle Sam takes a tax bite out of almost every asset sold and collectibles are no exception. Indeed, collectibles are currently subject to one of the highest rates of federal taxation on investment property. Capital gain from the sale of a collectible is taxed at 28 percent.

What is a collectible?

What is a "collectible?" Of course, collectibles include stamps and coins, fine wines, glassware, and other commonly collected items.

It's important to keep in mind that less obvious items are often "collectibles." For example, a collection of political campaign buttons and badges can be a collectible. If an item is an antique, it is probably a collectible.

Higher tax rate

Traditionally, collectibles have been taxed at a high capital gains rate because of public policy arguments. Supporters of high capital gains tax rates for collectibles justify their position by the lack of broader benefits, such as innovation, new products and higher productivity, that society receives from collectibles. On the other hand, society benefits from the preservation of works of art, antiques and many other collectibles.

Currently, the capital gains tax rate for collectibles is 28 percent. This is significantly higher than the capital gains tax rate for stocks, securities and many other investments, which enjoy a 15 percent capital gains tax rate (five percent for taxpayers in the 10 or 15 percent tax brackets).

Understanding basis

Before you calculate gain, you have to have an understanding of basis. If you purchased the item, then your calculations start with the cost of acquisition. These costs include not only what you actually paid for the collectible but also auction and broker's fees.

Inherited collectibles are treated differently. Your basis is the collectible's fair market value at the time of inheritance. Most commonly, fair market value is determined by an appraisal but there are other methods. Another way to show fair market value is by looking at current sales of comparable collectibles.

Your collectible may have been a gift from another person. In this case, your basis is the same as that of the person who made the gift.

Many collectibles require special care. You may have spent money to maintain the collectible or restore it. These costs are also part of your basis in the collectible.

After you have calculated your basis in the collectible, you subtract your basis from the amount you sold the item for. This is your capital gain.

Example. Beverly inherits a 19th century rocking chair from her grandmother. Shortly before she died, Beverly's grandmother had the chair appraised. Its value was determined to be $2,000. Beverly spends $500 to restore the chair. Two years later, Beverly sells the chair online. Beverly earns $3,900 from the sale. Beverly's basis in the chair is ($2,500) ($2,000, which was the chair's fair market value when she inherited it, plus the $500 she spent to restore it). Beverly's capital gain is $1,400 ($3,900 minus $2,500). As a collectible, it is taxed at 28 percent rather than 15 percent, a difference of $182 in tax.

"Gold bug" advice

The price of gold has almost doubled in the past several years. Investing in gold presents two issues. First, there is the issue of valuing gold coins. When coins have numismatic worth exceeding their face denomination, the amount realized is the numismatic value of the coins, not the face value. Second, if you want to invest in the price of gold rather than in the collectible nature of a gold coin, you should consider investing in gold strictly as a precious metal, such as through gold-mining stocks. That interest, and the gain realized by selling it, is entitled to full capital gain treatment. Do keep in mind however that mutual funds (such as the now defunct US Gold Trust) which buy and sell gold for their shareholders, exchange-traded funds (such as GLD and IAU) which buy and sell gold for their shareholders, and direct purchases of gold bullion and/or gold futures, are considered collectibles! The same applies to silver and other precious metals and gemstones."