The taxation of collectibles

By Troy K. Lewis, CPA, CGMA; Brian C. Spilker, CPA (inactive), Ph.D.; and Kamri S. Call

 PHOTO BY IDEABUG/ISTOCK
PHOTO BY IDEABUG/ISTOCK
 

EXECUTIVE
SUMMARY

 
  • The Taxpayer Relief Act of 1997, while lowering the maximum capital gains rate on gains from the sale of most assets to 20%, left the maximum rate on gains from the sale of collectibles at 28%.
  • The types of assets that are collectibles are listed in Sec. 408(m) and proposed regulations. However, the IRS has the authority to specify "any other tangible property" as a collectible for these purposes.
  • Collectible gains also include gains, but not losses, from the sale of an equity interest in a passthrough entity to the extent the gain from the sale is attributable to unrealized appreciation in collectibles owned by the passthrough entity.
  • Special netting rules apply in determining the amount of collectibles gain for a tax year.
  • In certain situations, involving the phaseout of the alternative minimum tax exemption or the Sec. 199A deduction, the marginal rate on collectible gains can exceed 28%.
  • Due to the higher tax rate on gains from the sale of collectibles, practitioners and taxpayers should consider a number of strategies that can reduce the amount of collectibles gains, including structuring a sale of a collectible to recognize gain over multiple years.

The federal income taxation of gains (and losses) from the disposition of investments in collectible assets (collectibles) is relatively unfamiliar to many practitioners for several reasons. First, the tax definition of collectibles is complex and can easily be misinterpreted. Second, the netting process for collectible gains and losses is more complicated than it is for typical capital gains and losses. Finally, the applicable tax rate for net collectible gains is different than for other capital gains and losses. This article assists tax practitioners in understanding the definition of collectibles for tax purposes, explains how gains from collectibles are taxed, and provides practical strategies that taxpayers can use to lower their tax burdens on collectible gains.

Historical view

Since 1997, the distinction between a collectible and other types of capital assets has mattered for purposes of the capital gains and losses netting process and the tax rate on net capital gains (excess of net long-term capital gains over net short-term capital losses). Before the Taxpayer Relief Act (TRA) of 1997 was enacted,1 the entire amount of net capital gains was taxed at a maximum rate of 28% with no distinction made for the type of long-term capital gain. Afterward, the maximum tax rate on net capital gains was reduced to 20% for gains on most capital assets.

However, in passing capital gains tax reform as part of the TRA, Congress defined collectibles separately and chose to leave the maximum rate assessable on collectible gains at 28%.2 Those in favor of taxing collectible gains at a higher rate than other capital gains argued that collectibles were mostly owned by the wealthy and that gains from those collectibles neither motivated innovation nor stimulated economic growth.3They further maintained that taxing collectible gains at a higher rate produced desired vertical tax equity while still being politically palatable. The challenge for the drafters of the legislation in applying the higher tax rate for collectibles was in defining the term "collectible."

Under the current tax system, there are three categories of capital gains. The first category, and most common, is capital gains subject to a rate of 0%/15%/20%, depending on the taxpayer's taxable income exclusive of these gains. These gains include capital gains other than capital gains in the other two categories. The second category of capital gains is unrecaptured Sec. 1250 gain. These gains are subject to a maximum 25% rate. The final category of capital gains is collectibles. Collectible gains, the focus of this article, are subject to a maximum rate of 28%.

Collectible gain and loss defined

Sec. 1(h)(5)(A) provides that a collectible gain or loss means a gain or loss from the sale or exchange of a collectible that is a capital asset held for more than a year. Thus, for example, gain from the sale of a collectible held as an investment (e.g., antique furniture) for more than a year by one taxpayer could potentially qualify as a collectible gain, but the same asset owned by a dealer for sale as inventory (not a capital asset) in the ordinary course of business would be ordinary income no matter how long the dealer held the asset.4

Sec. 1(h)(5)(A) provides that for an asset to be a collectible for income tax purposes, it must meet the definition of a collectible provided in Sec. 408(m). Sec. 408(m) was originally enacted to prohibit speculative asset investment in collectibles within an individual retirement account (IRA). The cross-reference from Sec. 1(h)(5)(A) to Sec. 408(m) increases the complexity of the collectible definition for purposes of determining the netting process and applicable tax rate for collectible gains and losses. Sec. 408(m)(2) defines a collectible as:

  • Any work of art;
  • Any rug or antique;
  • Any metal or gem;
  • Any stamp or coin;
  • Any alcoholic beverage; or
  • Any other tangible personal property specified by Treasury.

Prop. Regs. Sec. 1.408-10(b)5 expands the Sec. 408(m)(2) definition of a collectible to also include:

  • Any musical instrument; and
  • Any historical objects (documents, clothes, etc.).6

Sec. 408(m)(3) excludes certain metal coins and bullion from the definition of a collectible for purposes of the IRA provisions. However, Sec. 1(h)(5)(A) explicitly denies the Sec. 408(m)(3) exception for gold and silver coins (e.g., American Eagle coins) and bullion for income tax purposes and instead treats these coins and bullion as collectibles for purposes of computing the income tax.

While it is clear that gold and silver coins are collectibles, what about bullion-backed precious metal exchange-traded funds (precious metal ETFs)? Are they also considered collectibles? Because precious metal ETFs (e.g., gold, silver, platinum, and palladium) are physically backed by precious metals such that each precious metal ETF share represents ownership in the underlying precious metal, precious metal ETF shares are considered to be collectibles.7 Examples of common gold ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and ETFS Physical Swiss Gold Shares (SGOL). As the spot gold price has risen from around $350 per ounce in 1997 when the TRA was passed to over $1,500 per ounce in the fall of 2019 (reaching a maximum of nearly $1,900 in 2011), some investors currently may have significant unrealized gains in gold coins, gold ETFs, and other precious metal ETFs that are exposed to the higher capital gains tax rate applicable to collectible gains. Taxpayers may be unaware that these gains are potentially subject to a higher tax rate than gains on other types of investments.

A common misperception is that an asset is not a collectible for tax purposes unless it is explicitly identified in either Sec. 408(m) or Prop. Regs. Sec. 1.408-10(b). However, as provided in Prop. Regs. Sec. 1.408-10(b), the IRS has the authority to deem any tangible property not specifically listed in either Sec. 408(m) or Prop. Regs. Sec. 1.408-10(b) as a collectible for Sec. 408(m)(2) purposes and, thus, by reference for Sec. 1(h)(5) purposes. For example, collectibles could include restored automobiles,8 valuable baseball cards, or even rare comic books. Thus, taxpayers who did not report gains from the sale of these assets as collectible gains simply because these assets were not explicitly listed as collectibles in either Sec. 408(m)(2) or Prop. Regs. Sec. 1.408-10(b)(8) might be exposing themselves to potential tax underpayment penalty risk under Sec. 6662(d).9

Taxpayers and their advisers may be unaware that the definition of collectible gains also includes gains, but not losses, from the sale of an equity interest in a passthrough entity (i.e., a partnership, S corporation, or trust) to the extent the gain from the sale is attributable to unrealized appreciation in collectibles owned by the passthrough entity.10 Thus, for example, if a taxpayer sells a partnership interest that owns a collectible, the taxpayer is required to include his or her share of the unrealized gain, if any, from the collectible upon the disposition of the partnership interest as if the partnership had sold all of its assets individually and allocated gain from the collectible to the partners. That is, the passthrough entity owner is required to recognize as collectible gain the amount of gain (but not loss) that would be allocated to that owner if the entity were to sell all of its collectibles for cash equal to the fair market value (FMV) of the assets in a fully taxable transaction immediately before the sale of the passthrough entity ownership interest.11 The following example from the Treasury regulations illustrates this provision.12

Example 1: A and B are equal partners in AB Partnership, which was formed three years ago. A sold her entire interest in AB Partnership to individual C for $15,000. At the time of the sale, AB Partnership's tax balance sheet is reflected in the table "Partnership AB's Assets, Liabilities, and Capital" (below).

Partnership AB’s assets, liabilities, and capital

At the time of the sale, A's basis in her partnership interest was $10,000 ($9,000 plus $1,000, A's share of AB Partnership's liabilities). None of the property is subject to Sec. 704(c). The total amount realized is $16,000, consisting of the cash received of $15,000 plus the $1,000 share of A's debt that is assumed by C. A's interest in AB Partnership includes a one-half interest in all the assets. A's total realized gain on the sale of her AB Partnership interest is $6,000 ($16,000 realized minus the tax basis of $10,000). The character of the gain is calculated under Sec. 1(h)(5) because AB Partnership held collectibles at the time of A's sale of her AB Partnership interest.

A's $7,000 allocable share of the underlying gain on the unrealized receivables ($7,000 market value less $0 tax basis), will be treated as ordinary income.13 Thus, with the total gain on the sale of the AB Partnership interest of only $6,000, A will have $7,000 of ordinary income and $1,000 of pre-lookthrough long-term capital loss.

If AB Partnership were to sell all its collectibles in a fully taxable transaction for cash equal to the FMV of the assets immediately prior to A's selling her partnership interest to C, A would have been allocated $1,000 of collectible gain. Therefore, A would recognize $1,000 of collectible gain on the sale of her partnership interest because of the collectible held by AB Partnership.

The difference between A's pre-lookthrough long-term capital loss of $1,000 and the $1,000 of long-term capital gain recast under this provision as a collectible gain would mean that A will report $2,000 of a noncollectible long-term capital loss and $1,000 of collectible gain so the net residual total equals a $1,000 net capital loss. Thus, in total A will report a net gain on the sale of her AB Partnership interest of $6,000 comprised of ordinary income of $7,000, a noncollectible long-term capital loss of $2,000, and collectible gain of $1,000.

Note that if A did not have any other capital asset transactions for the year (and no net capital loss carryover), A would report a net capital loss of $1,000 for the year ($1,000 collectible gain minus $2,000 of noncollectible long-term capital loss) that would be available to offset ordinary income ($3,000 annual deduction limit for a net capital loss). However, if A recognized $2,000 of (noncollectible) additional long-term capital gains from other sources, A would report a net capital gain of $1,000 that would be a collectible gain (the $2,000 noncollectible long-term capital gain and the $2,000 noncollectible long-term capital loss net to $0) subject to a maximum tax rate of 28% rather than the typical 0%/15%/20% rate.

Capital gain and loss netting to determine gain subject to 28% maximum rate

When taxpayers have capital gains and/or losses in the 25% (gains only) and/or 28% categories in addition to capital gains and/or losses in the 0%/15%/20% category, the netting process is more complicated. The netting process14 requires taxpayers to separate capital gains and losses into short-term capital gains and the three long-term categories. All the gains and losses (if applicable) in each character category are netted first within each category. If after netting, there is a net capital loss in the 0%/15%/20% category, it is offset first against net gains in the 28% category. Likewise, if there is a long-term capital loss carryforward from a prior year, that loss is first netted against net gains in the 28% category (if any).

Finally, if there is a net short-term capital loss after the initial netting within the 0%/15%/20% category (short-term capital losses exist only in the 0%/15%/20% category), the short-term loss would also first be used against any residual 28% category net capital gain that might exist after the initial netting process. Thus, the tax law operates to allow any net capital losses or long-term capital loss carryforward in any other category to first offset net gains in the 28% category.

Losses realized on disposition of collectible assets

Losses from selling collectible assets are deductible capital losses that enter the netting process described above provided that the taxpayer held the collectible for investment purposes rather than personal purposes. If the taxpayer was holding the collectible for personal purposes, the loss realized on a sale of the collectible is a nondeductible personal loss. Whether the taxpayer was holding the collectible as an investment asset or as a personal asset depends on the taxpayer's intent for holding the asset. A taxpayer is considered to be an investor when the taxpayer acquires and holds a collectible asset with the primary expectation of selling it at a profit. In contrast, a taxpayer is not considered to be an investor when the taxpayer acquires the collectible primarily for personal use and enjoyment without consideration of whether the asset will appreciate in value.15 For example, in the case of artwork as the collectible, an investor will store, rather than display, the acquired artwork waiting for asset appreciation before selling. In contrast, a noninvestor will display and enjoy the art while rarely selling any of it.

Marginal tax rate surprises

The statutory tax rate on collectible capital gains (after all applicable netting) is a maximum 28% rate or the rate at which the gain would be taxed if it were ordinary income, if lower.16 When taxpayers have ordinary income, collectible gains, unrecaptured Sec. 1250 gains, and other long-term capital gains, it is important to consider the order in which ordinary income and net capital gains are applied in order to determine the rate at which the collectible gain would be taxed if it were ordinary income. Ordinary income is taxed first, followed by 25% gain, followed by 28% gain, and then the 0%/15%/20% gain.

There are situations where the marginal tax rate can exceed the "maximum" 28% income tax rate to the surprise of unsuspecting taxpayers and their advisers. For instance, the marginal tax rate on collectible gains can exceed the 28% rate due to things such as the alternative minimum tax (AMT) and the Sec. 199A qualified business income (QBI) deduction.

Marginal tax rate with AMT

When a taxpayer with a net capital gain pays AMT, the net capital gain is taxed for AMT purposes at the same stated rate it was taxed for regular income tax purposes.17 The tax on net capital gains is simply added to the tentative minimum tax computed on the AMT base exclusive of the net capital gain. Thus, generally, when a collectible gain is taxed at 28% for regular tax purposes, it is also taxed at 28% for AMT purposes. However, when a taxpayer's alternative minimum taxable income (AMTI) is in the AMT exemption phaseout range, the deductible exemption amount is phased out 25 cents for every dollar above the threshold amount.

Thus, if a taxpayer's collectible gain is taxed at 28% for regular tax purposes and the taxpayer is in the AMT exemption phaseout range, every dollar of collectible gain increases AMTI by $1.25 because the taxpayer loses $0.25 of the exemption for each dollar of AMTI increase. Consequently, the marginal tax rate for taxpayers in these circumstances is 35% (0.28 × 1.25). For 2019, the exemption phaseout range is $1,020,600 to $1,467,400 of AMTI for married taxpayers filing jointly (MFJ), $510,300 to $733,700 of AMTI for married taxpayers filing separately, and $510,300 to $797,100 of AMTI for other taxpayers.18

Marginal tax rate with QBI deduction

Taxpayers performing a specified service trade or business (SSTB) can claim the full QBI deduction when their taxable income (before the deduction) is below a certain threshold (2019 amount of $321,400 for MFJ taxpayers, $160,700 for taxpayers who file as single or head of household, and $160,725 for married taxpayers filing separately, indexed for inflation). However, the deduction is phased out over a range of taxable income ($100,000 for MFJ taxpayers and $50,000 for other taxpayers) over the threshold so that it is completely phased out when taxable income before the deduction reaches a certain level ($421,400 for MFJ taxpayers, $210,700 for taxpayers who file as single or head of household, and $210,725 for married taxpayers filing separately).19 Consequently, when a taxpayer recognizes a collectible gain that increases taxable income (before the deduction) above the threshold, but within the phaseout range, the marginal rate on the collectible gain is considerably higher than the stated 28% maximum rate.

Example 2 (QBI case): J is an owner of a law firm, an SSTB for Sec. 199A purposes. The firm is an S corporation, and J's share of the S corporation's business income in 2019 is $200,000. J's taxable income on his MFJ tax return before the QBI deduction is $321,400. J's MFJ tax liability is computed as follows:

  • Tentative QBI deduction is $40,000 ($200,000 × 20%) and will not be limited by the SSTB limitation because J's taxable income before the QBI income is equal to or less than the taxable income threshold of $321,400.
  • Taxable income after the QBI deduction: $281,400.
  • Tax is $55,885, using ordinary rates.

Consider what would happen if, in addition to the original facts, J and his spouse, H, also sold a piece of art, generating a collectible gain of $100,000. J and H's taxable income, including the sale of the art, is $421,400.

  • The tentative QBI deduction is $0 because J's law practice is an SSTB and J's taxable income exceeds the phaseout range that would permit a partial QBI deduction.
  • Tax on ordinary income is $65,485 plus $28,000 tax on the sale of the art for a total tax of $93,485.

Comparing the two scenarios, the marginal tax rate on the collectible gain is 37.6%, calculated as: ([$93,485 - $55,885] additional tax ÷ $100,000 additional income). This marginal rate of 37.6% is 9.6 percentage points higher than the stated maximum 28% rate for gains on collectibles.20

Net investment income tax and state and local taxes

In addition to paying federal income tax on collectible gains, taxpayers recognizing collectible gains (and other types of capital gain) may owe federal excise tax because collectible gains are potentially subject to the Sec. 1411 net investment income tax.21 The net investment income tax can add an excise tax of 3.8% to collectible gains, depending on the taxpayer's adjusted gross income and additional investment income and allocable expenses. Collectible gains are often also subject to state and local income taxes.22 The net investment income tax and additional state and local income taxes increase the combined marginal tax rate on collectible gains (as they would increase the marginal tax rate on other types of capital gains), which increases the importance of tax planning for collectibles. While it may not be the general rule, as illustrated above, collectible gains could be taxed at a combined tax rate of nearly 54% when considering potential federal and state taxes on the gain (37.6% federal income tax (see Example 2) + 3.8% net investment income tax + 12.3% state taxes).23

Planning opportunities

Because the marginal federal income tax rate on gains from the sale of collectibles is generally much higher than the marginal federal income tax rate on gains from the sale of other capital assets, tax planning strategies for collectibles gains generate more tax savings than similar tax planning strategies for other capital gains. In addition to considering nontax costs and benefits of selling the collectible, the tax adviser may want to also consider some of the following alternative basic planning strategies as opposed to selling the asset in a taxable transaction.

Recognize gain over multiple years

In situations where the gain from a collectible would be taxed at a rate higher than 28% because the additional income from the sale causes phaseouts of other tax benefits (e.g., the AMT exemption or the QBI deduction), the taxpayer may consider structuring the sale to recognize gain over multiple years rather than recognizing the gain all at once either by selling a portion of the collectible asset each year or by using the installment method to report the gain so that the additional income does not push the taxpayer over a phaseout threshold.

For example, a taxpayer may consider selling a portion of her gold coins in one year (say near the end of the year) and sell the rest in the next year (near the beginning of the next year) or sell a block of shares in a precious metals ETF one year and sell other shares in the next year. This strategy would not work for certain collectibles that cannot be split into parts or pieces (e.g., a work of art, or a violin, or an antique car). In these situations, the taxpayer could spread the recognized gain on the sale of the asset over multiple periods by entering into an installment sale agreement with the buyer.

Sec. 453 provides that if a taxpayer receives at least one payment for the sale of a collectible (other than precious metal ETFs) or other type of qualifying asset after the close of the tax year in which the sale occurs, the taxpayer can use the installment method to recognize gain. Under the installment method, the taxpayer recognizes a percentage of each payment as gain and a percentage of each payment as a return of basis. The gain percentage is based on the ratio of the gain realized on the sale to the amount realized (contract price) from the sale. That is, a percentage of each payment is treated as gain, and a part of each payment is treated as a return of basis.

While an installment sale may be a useful tax planning strategy, from a nontax perspective it involves credit risk because the taxpayer must extend credit to the buyer to qualify for an installment sale. The taxpayer must, therefore, consider whether the risk associated with extending (likely unsecured) credit to the buyer over the payback period is acceptable.

Donating the collectible to a qualified charity

If a taxpayer who owns a collectible (recall that the definition of a collectible requires the taxpayer to hold the property for more than a year) is planning on making a cash charitable donation, the taxpayer may be able to contribute the collectible directly to a charity and claim a charitable deduction for the collectible's FMV. The taxpayer could retain the cash the taxpayer would have otherwise contributed without having to recognize the gain built in to the contributed collectible.24 This process is relatively straightforward for precious metal ETFs. It can be accomplished by asking the taxpayer's stockbroker to transfer the ETF shares to a designated charity.

In general, achieving the same FMV donation deduction outcome with tangible personal property collectibles is possible only if the charity is expected to use the collectible in its charitable function.25 For instance, the donation of an antique violin to a symphony (qualified charity) that will be used by the concertmaster would qualify for an FMV deduction amount, while a donation of a painting to the same symphony that is expected to be sold immediately upon receipt would generate a deduction equal to the basis of the painting.26

The IRS has ruled that nonrare gold coins (such as Krugerrands, U.S. Mint gold coins, and Canadian Maple Leaf coins) are to be treated like currency27 and are therefore not subject to the restrictions applicable to the donation of tangible personal property.28 Thus, for example, a taxpayer donating American Eagle gold coins to a public charity is allowed to deduct their FMV and exclude the gain realized on the exchange even if the charity immediately sells the coins.

Selling capital loss property

Taxpayers who recognize collectible gains during a year could offset them by selling short-term and long-term capital assets that have unrealized losses (to the extent the taxpayer owns capital loss property). As discussed earlier in this article, capital losses from collectibles (when the taxpayer is an investor in the collectibles) and noncollectibles can offset collectible gains.29

Reinvest gain proceeds into a qualified opportunity fund

The law known as the Tax Cuts and Jobs Act30 contains a provision that allows taxpayers to defer, and possibly exclude, a portion of their realized capital gains (including gains from collectibles).31 To qualify for this provision, taxpayers must invest the proceeds of the sale up to the amount of the gain, in a qualified opportunity fund (QOF) within 180 days of the sale.32

Taxpayers that hold the QOF ownership interest for at least five years increase their basis in the fund by 10% of the gain originally deferred.33 Taxpayers that hold the QOF ownership interest for at least seven years increase their basis in the fund by an additional 5% of the gain originally deferred.34 Thus, taxpayers who hold the QOF ownership interest for at least five years can permanently exclude 10% of the gain originally deferred, and taxpayers who hold the QOF ownership interest for at least seven years can permanently exclude 15% of the gain originally deferred.35 In any event, all gains deferred under this provision, not otherwise excluded, must be recognized on the date the QOF ownership interest is sold or by Dec. 31, 2026, if later.36

When the gain originally deferred is recognized, the character of the gain is based on the character of the asset originally sold; thus, for taxpayers using this provision to defer collectible gains, presumably, the collectible rate in effect when the gain is recognized (the date the QOF interest is sold, but not later than Dec. 31, 2026) will apply to the amount of the originally deferred gain.37 Taxpayers holding the QOF interest for 10 years or longer can exclude all remaining gain they realize on the sale.38 To exclude the gain, taxpayers must sell the QOF interest no later than Jan. 1, 2048.39

The qualification rules for the QOF status are somewhat complex, and most of the detailed rules are still being developed. Consequently, advisers should take care to ensure the taxpayers' investments in QOFs qualify for the deferral and potential exclusion provisions.40

Estate planning in general

For tax planning purposes, taxpayers who own collectibles that they plan to transfer to others via gift or bequest should evaluate which of their asset types are more tax-efficient to hold and which are better transferred prior to death. By gifting a collectible, the collectible is no longer in the taxpayer's estate and is thus no longer subject to the estate tax on the taxpayer's death.41 However, the recipient of the gift generally takes a carryover basis from the taxpayer making the gift and will thus recognize more collectible gain when the recipient sells the collectible than the recipient would have recognized by inheriting the property.42

Conversely, if the taxpayer holds the collectible until death, its value is included in the taxpayer's estate.43 If the estate is large enough, it will be subject to estate tax; however, the beneficiary inheriting the collectible takes the collectible with an FMV basis. Thus, the unrealized gain on the collectible asset as of the date of the taxpayer's death escapes income taxation if the beneficiary dies while owning the asset.44

When estate planning with collectibles, it is also especially important to consider nontax consequences. Collectibles can, by their nature, carry more sentimental value with family members than other types of assets. Thus, a taxpayer's estate might include a collectible that represents memories, experiences, and emotions, all of which may be more important than the asset's monetary value. The antique violin the estate was planning to sell may be the violin the taxpayer's grandmother played for 20 years every Sunday at church services; the precious gems the estate is planning to sell may have been a special gift from the taxpayer's great-grandfather to her grandmother. It is important for tax advisers to be sensitive to the potentially emotional nature of disposing of family items. Advisers would be wise to address the disposition of important family collectibles early on to give enough opportunity for all family interests to be considered.

Collectibles should be part of tax planning

Because taxpayers generally sell fewer collectibles than other types of investment assets, many practitioners may not be familiar with critical aspects of the taxation of gains or losses on the disposition of collectibles. This unfamiliarity can lead to inaccurate tax projections and suboptimal tax planning. By focusing on the hidden traps and understanding planning opportunities, taxpayers and their advisers can better manage unrealized gains on collectibles in their investment portfolios.

Footnotes

1Taxpayer Relief Act of 1997, P.L. 105-34.

2Taxable gains from the sale of Sec. 1202 stock were also left at a maximum 28% rate. Sec. 1202 excludes from gross income a certain portion of the gain realized on the sale of qualified small business stock.

3Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1997 (JCS-23-97), pp. 48-49 (Dec. 17, 1997).

4Gain or loss from the sale of a collectible held as an investment for a year or less would not be a collectible gain or loss and would generate a short-term capital gain or loss.

5This proposed regulation was issued on Jan. 23, 1984, and has not been successfully challenged or withdrawn since issuance.

6Interestingly, neither the Internal Revenue Code nor administrative authority provides criteria the IRS would use to determine whether tangible property that is not specifically listed in the Code or the regulations is a collectible for purposes of Sec. 408. Presumably, a collectible is an asset of limited quantity that is sought for various reasons, including its appreciation potential. It appears a collectible may or may not be part of a traditional "collection."

7IRS Program Manager Technical Advice 2008-01809 (5/2/08).

8Letter from Harry J. Conaway, associate tax legislative counsel for the Treasury Department to Sen. Richard Lugar, R-Ind., July 5, 1988; reprinted in CCH Pension Plan Guide ¶17,378H.

9For instance, in April 2004, then presidential candidate Sen. John Kerry, D-Mass., filed his 2003 federal income tax return reporting a $175,000 gain on the sale of a quarter-interest in a 17th century Dutch painting. He originally reported the sale as a capital gain subject to a 20% tax rate, rather than as a collectible subject to a 28% tax rate, resulting in an underpayment of $11,577 in income tax. The error was discovered by several tax professionals who reviewed the senator's publicly disclosed 2003 tax return. The tax return was promptly amended and the error corrected after the public scrutiny (see Sheppard, "Presidential, and Would-Be, Tax Returns," 103 Tax Notes 396 (April 26, 2004)).

10Sec. 1(h)(5)(B).

11Regs. Sec. 1.1(h)-1(b)(2)(ii).

12Regs. Sec. 1.1(h)-1(f), Example 1.

13Sec. 751(a)(1).

14Notice 97-59.

15IRS, Audit Technique Guide: Artists: Art Galleries, pp. 2-3 (January 2012).

16Sec. 1(h)(1). A similar rule also applies to unrecaptured Sec. 1250 gain taxed at a maximum 25% rate.

17Sec. 55(b)(3).

18Rev. Proc. 2018-57.

19Sec. 199A also provides for a reduced deduction in the event the taxpayer's taxable income exceeds the same threshold amounts and the taxpayer does not have certain amounts of W-2 wages paid or investment in depreciable assets.

20If both the SSTB and the W-2/depreciable property limitations apply, at certain points in the phaseout range, the federal marginal tax rate can be as high as 64%. See Shuldiner, "Marginal Rates Under the TCJA," 159 Tax Notes 1911 (June 25, 2018).

21 An excise tax under Chapter 2A of the Internal Revenue Code.

22 Some states have a significant top marginal rate, such as California with a rate of 12.3%.

23 As discussed previously, at some points throughout the QBI deduction phaseout range, assuming both an SSTB and a W-2/depreciable property limitation applies, the combined marginal tax rate could be as high as 80.1% (64% federal income tax + 3.8% net investment income tax + 12.3% state taxes).

24See Rev. Ruls. 55-410 and 57-506.

25Sec. 170(e)(1)(B)(i); Regs. Sec. 1.170A-4(b)(2). If the charity puts the donated tangible personal property to an unrelated use, the donor will be required to reduce his contribution amount by the unrealized appreciation of the collectible asset.

26In both cases the taxpayer would not recognize gain on the appreciation of the contributed asset pursuant to Rev. Ruls. 55-410 and 57-506.

27Rev. Rul. 69-63.

28IRS Letter Ruling 9225036.

29Sec. 1(h)(1).

30P.L. 115-97.

31Sec. 1400Z-2.

32Sec. 1400Z-2(a)(1)(A).

33Sec. 1400Z-2(b)(2)(B)(iii).

34Sec. 1400Z-2(b)(2)(B)(iv).

35Sec. 1400Z-2(b)(2)(B).

36Sec. 1400Z-2(b)(1).

37Prop. Regs. Sec. 1.1400Z2(a)-1(b)(5).

38Sec. 1400Z-2(c).

39Prop. Regs. Sec. 1.1400Z2(c)-1(b).

40Additional information can be found in Nitti, "Opportunities Beckon in New Qualified Opportunity Zones," 50The Tax Adviser 356 (May 2019).

41However, the transfer of the property will be subject to gift taxation under Sec. 2501.

42Sec. 1015.

43Sec. 2031.

44Sec. 1014(a).

 

Contributors

Troy K. Lewis, CPA, CGMA, is an associate teaching professor, and Brian C. Spilker, CPA (inactive), Ph.D., is the Robert Call/Deloitte Professor, both at Brigham Young University in Provo, Utah. Kamri S. Call, M.Acc., is a tax consultant at Deloitte in McLean, Va. For more information on this article, contact thetaxadviser@aicpa.org.

 

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By now many of us are familiar with the various provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Here is a list of changes together with (perhaps) unexpected nuances.

DEDUCTIONS

Qualified business income deduction regs. and other guidance issued

The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.