No matter what type of art they prefer, art collectors make an investment of both energy and money. So it's only natural that they want to get the most back from both of those investments. When you sell a piece, then, what do you need to know about the resulting tax bill? Here are a few key elements of the sales transaction and how they can help you avoid tax surprises.
1. Sales Price
The good news for art collectors is that the sales price of their piece is not the amount they will eventually pay taxes on. It's a key starting point, though, so keep good records of final sales transactions. Remember that the sale of nearly all collectible items is generally subject to tax, and it's also something that many tax agencies can verify on their own.
2. Tax Basis
Profit is, in general, the difference between what you sold an item for and what you paid for it. However, for items held for investment — known as capital assets — the amount you paid for it includes more than just the purchase price. The tax basis includes things like sales tax, shipping costs, broker fees, updates that increase its value, and costs of selling it. Documenting these helps lower your tax bill.
3. Capital Gains
A capital gain occurs when you sell an asset for more than the tax basis. Although this is taxable income, the gain from capital assets held for more than one year is not taxed at the same rate as your salary or business income. Capital gains tax rates vary from 0% to 20% as of 2021. This means that the timing is important to your tax bill.
4. Capital Losses
A capital loss occurs when you sell that artwork for less than its tax basis. A loss can be used to cancel out other capital gains if you sold multiples pieces in the same year or even to reduce your regular taxable salary. Keep in mind that a loss can occur by tax rules even if your own accounts show that you actually made a profit on the sale. This is still a legitimate loss.
5. Ordinary Income
While most art collectors keep most pieces for more than a year, you might choose to sell items faster at times. When doing so, capital gains are considered ordinary income and are taxed at the same rate as your other income. It behooves many investors, then, to hold these works for at least a year to take advantage of lower tax rates.
Where to Learn More
The buying and selling of any collection can be complex for tax purposes. The best place to learn how you can keep your tax bill lower with proper documentation and tax strategy is by meeting with an experienced tax preparation service in your state today. Then you can enjoy your passionate hobby more and worry about money less.
Reach out to a professional who provides tax services in your area.
