There was an interesting article in the Wall Street Journal on Valentines Day (good to know they still have a sense of humor) about how the IRS classifies collectors into three categories for tax purposes: 1) Collectors; 2) Investors; and 3) Dealers.

Depending on which category you decide on (and presumably stick to), the IRS will handle collecting-related deductions differently. A “collector”, according to the WSJ piece, is someone who buys and sells primarily for their own personal pleasure; An “investor” buys primarily to make a profit, and a “dealer” is in the business of buying and selling.

Collectors can’t take deductions for costs related to their collections because the expenses are considered personal. Investors can deduct some expenses, but must be able to show they’re tracking the values of the items, and getting appraisals on a regular basis (as always, consult your tax advisor, we are not providing financial advice here).

In either case, sales of collectibles are subject to a 28% capital gains tax, which may surprise those who are used to the much lower 15% rate on stocks and other investments. For “investors” (but not “collectors”), there’s also the option to trade items (a ‘like kind exchange’, similar to real estate swaps) without paying tax, but this is tricky and requires more documentation.

If you plan to hang on to your collection and pass it along to your family, then another set of tax considerations comes into play (see our recent post about establishing the cost basis of a collection). Anyway, good luck with tax season. I have to do my taxes – but I might spend this afternoon looking for antiques instead!