Tax Implications of Original Art Transactions

[delekkerste]

Any accountants on the Boards here? This is a topic that has come up a few times recently, especially as a lot of art changes hands at 5 and even 6 figures nowadays.

 

What are the tax implications when you a sell a piece of art, and what is the threshhold where it actually matters? I know that the federal capital gains tax on collectibles is 28%, but when does it get enforced? If you buy a page for $200 and then sell it to your buddy for $350, I'm pretty sure nobody cares if that gets reported or not. But, let's say you bought a cover for $8,000 five years ago and now you have a buyer at $32,000 today (not unheard of in this market). What then? Does the gain have to be reported? Can you defer the gain by rolling the proceeds into another piece of art within a certain timeframe (like for houses, though I am skeptical that it applies here)? Does it matter if it is a transaction involving two collectors, as opposed to a dealer (who files returns as a business to the IRS) and a collector? What about losses on collectibles sales? :shrug:

 

I have heard of 4, 5 and even 6 figure deals in both comics and OA that have been done in cash (as in currency) to avoid the tax man - but what exactly are the tax implications and how are they enforced? To date, I have hardly sold anything, so it hasn't been an issue, but it would be good information to know for future reference.

[NelsonAI]

For the U.S. market, I'm no expert but ....

 

It is always the burden of the individual to report their capital gains to the IRS.

 

Traditionally, all financial transactions $10,000 and up must be reported (banks, retailers, auction houses, financial institutions, paypal, etc.). However, this doesn't mean that suspicious behavior such as multiple deposits of $9,900 aren't going to catch the eye of somebody.

 

Al Capone - anyone ?

 

Chances are, the IRS will focus on the large ticket items of auction houses. If you've sold a high ticket item, (i.e., $40 million Freud painting), via Heritage, Sotheby's, Christie's, etc. you're probably better off reporting the gain.

 

For individuals there is no rollover if you buy something else with the proceeds. They are 2 separate transactions. You can not defer the gain. However, like stocks, if you report all your transactions, you can net your capital losses against your capital gains.

 

It's also good to keep track of your total cost -- some reasonable expenses incurred to buy the art could be factored into your cost basis. Shipping, insurances, taxes, buyer's to buy the art should be part of your cost basis. Likewise, your gain can also be reduced by seller's premium, restoration costs, other commissions, mylars, etc.

 

This does not imply that your expenses incurred for your entire trip to SDCC could be added to the cost basis of your Michael Golden Batman sketch.

 

If you pay for a high ticket item in cash currency, keep in mind, when it's your turn to sell, it gets hard to prove what your cost basis is. Or try filing for an insurance claim.

 

BTW - No rollover for housing -- although you can get a $250K gain exclusion for single, $500K gain exclusion for couples filing joint.

 

Consult with your own financial advisor in your local tax jurisdiction.

 

Cheers!

N

 

[comicartcom]

to answer your question easily

 

all income, regardless of where it comes from is taxable. period

 

the $150 you made on that $350 piece of art is taxable as income in the example you provided

 

the $27,000 you make on the $8000 purchase is also taxable.

If any of that art is material you owned for a long time as part of a collection, then most likely capital gains tax shouold be paid (capital gains is 18%)

 

If you are a dealer selling from your stock, yearly income is taxed at the normal tax rate

 

there is no sale that the IRS does not expect their piece

[groovyedwin]

Personnal taxes:

1) art => collectible/hobby => 28% federal tax on all gains with no minimum amount threshold to trigger the tax

 

2) no deduction/offset for losses on art sales

 

3) estimated tax payments quarterly to avoid underpayment penalities.

 

4) the gain amount may lead to reduced deductions (standard/itemize) than you would normally be allowed to take.

 

===> Recommend checking with a knowledgale tax person.

 

And don't forget state taxes.

[comicartcom]

Capital gains taxes are not at the full income rate - if the item was part of your collection and not , as I am, a dealer selling selling from "for sale stock"

 

also, CGT rate is 15% (not the 18% I previously mentioned)

http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

 

personal tax rate is actually 30% for those incomes below $80,000

http://www.treasurer.gov.au/DisplayDocs.aspx?pageID=&doc=pressreleases/2007/108.htm&min=phc

 

also, if you are a collector and you lose $$ on a purchase, as groovyedwin indicated, you cannot take a deduction in general

 

This is the same for gamblers of which as a Las Vegas resident I can tell you, if I win $100,000 playing poker this year I must pay the appropriate taxes for my profits. So if I started with $25,000 and I wind up with a $75,000 profit.. I must pay taxes on that money. However, if I lose $75,000 next year, I may not offset that loss against 2008's win, nor may I deduct that loss from 2010's taxes.

 

The reason is that you are perceived to be involved in recreational activity.

 

a dealer like myself however is not constrained by the same issues because I am perceived to be "in business selling same". So any costs or losses this year are deducted from the ongoing cost of my doing business and if I lose money in total in 2009, I do indeed get to measure that loss against any financial gain in 2010.

 

The tax rate of my profits of my art & movie poster selling business is taxed at standard income rate (presuming I am set up as an individual selling, and not as a corporation from which I instead take a salary). However on a separate level, if I sell art or posters from my collection and that have been documented as so, I only pay capital gains on that item.

 

Rich==========

[groovyedwin]

Just wanted to provide a link to the IRS site that has a summary on capital gains.

 

http://www.irs.gov/taxtopics/tc409.html

 

There are 3 exceptions to the 15% CGT.

 

‘2. Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.’

 

[NelsonAI]

 

IRS topic 409 regarding NET Capital Gains.

 

Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.

 

The term "net capital gain" means the amount by which your net long–term capital gain for the year is more than your net short–term capital loss.

 

This means you can offset your losses.

 

Again, consult with a professional financial advisor as it is clear that these message boards are not the best place to get tax planning advice. You get what you pay for (wink, wink).

 

Cheers!

N

 

 

 

[delekkerste]

OK, the thing is, I don't know any collectors in any hobbies who report any capital gains to the IRS. And, regardless of what the law says, I'm sure that the IRS doesn't really give a hoot if a collector (not a dealer operating a business) sells a $2 comic for $10, though I'm sure they do care if someone sells a $2 million painting for $10 million. But where's the de facto cut-off? $100? $1,000? $10,000? $100,000? Any insights on how this works in the real world would be appreciated...I've had this conversation with several collectors and nobody seems to really know for sure. :shrug:

[adamstrange]

'm sure that the IRS doesn't really give a hoot if a collector (not a dealer operating a business) sells a $2 comic for $10

 

Your question is similar to asking how much over the speed limit you can go without getting ticketed. In many states being no more than 5 mph over is fine but if the cop wants a reason to stop you and catches you 1 mph over then he can still write up the ticket. The thing to remember is that the IRS has a lousy sense of humor and no empathy for a tax dodger and to plan your actions accordingly.

[delekkerste]

I'm one of those collectors who sells things somewhere between never and rarely, so I'm just trying to figure out what the "real world" rules are. Saying that "everything is taxable" is not a very useful guideline considering there are millions and millions of transactions that go on everyday that don't get reported. I'm pretty sure the IRS wouldn't even want you to report the 16 cent "capital gain" when you sold your co-worker 2 stamps for $1 when he was in a bind; the wheels of commerce would grind to a halt if that was required.

 

Any "real world" guidelines would still be greatly appreciated.

[the blob]

delek - the five and six figure transactions, unless you're getting a bag of cash, are of the amount that they may trigger reporting requirements to the IRS if you're getting paid via paypal, wire transfer, check cut by the auction house, etc.

 

i used to think those were $10,000, but maybe with the patriot act they're $2,000 (one of the reasons new york's governor was taken down -- some of his wire transfers and/or payments to the escort service might have been reported to the feds as potentially fishy activity).

 

so, the answer is, the IRS might know about these big transactions....so you ought to think about reporting them!

 

but then again, remember your "NET" includes all costs, not just your purchase price. is the item being sold something you had listed on an insurance rider? you'd need to ask an accountant, but perhaps every premium you've ever paid attributable to it should count as part of your "cost"

[adamstrange]

I'm pretty sure the IRS wouldn't even want you to report the 16 cent "capital gain" when you sold your co-worker 2 stamps for $1 when he was in a bind; the wheels of commerce would grind to a halt if that was required.

 

If you ask the IRS, they'll tell you that you do need to report all income, minus expenses as part of your yearly or quarterly filings. They will never tell you that you can get a free pass on any amount and there are no guidelines on income you can avoid reporting, though there are different penalties that could apply depending on the amount of income understated and the means taken to hide it.

 

If you avoid reporting income on the 2 stamps it's unrealistic to think they will find out about it or that they'll care. But if you missed reporting income of even a few hundred and they wanted to use that against you as evidence of a pattern of deception they could. The IRS agent will have both guidelines to follow as well as discretion they can exercise so even a small amount of missing income that they uncover could result in additional scrutiny into your financial affairs. Your question may really be around guidelines the IRS will follow in an audit but even these will vary from office to office and there's still the judgment of the officials involved in a case.

 

And I would like to this time to say how much I love the IRS and the many fine people that make up it's staff.

[comicartcom]

You can also ask Wesley Snipes for tax advice.. I think he has a pretty good handle on it right about now

 

I'm not aware of his current address, however I'm pretty sure his phone number soon will be "1-800-I'm in jail"