Yogi Berra once said “records and achievements are meant to be broken”. His words were likely meant more to apply to actions of new players rather than the value of the denotation of earlier players by their baseball cards. Nevertheless, his words are applicable as another baseball record is surpassed: the most ever paid for sports memorabilia. A mint condition Mickey Mantle baseball card sold for $12.6 million last month.
The collectibles market seems to continue to grow both in what is considered a collectable and how much collectors are willing to pay for those assets. Although it is incredible to think of the profit that was gained in this market by Anthony Giordano, who purchased the card at an auction in 1991 for just $50,000, it should also be considered that the vast majority of the millions of baseball cards that have been printed did not end up increasing in value. In fact, even among the most valuable, the difference in valuation can be quite stark.
Last year, the History Channel put together a story on the most valuable baseball cards. At the time, the most valuable card was a Honus Wagner that sold for $6.606 million. In contrast, the 9th most valuable card at the time was a Ken Griffey Jr. card which sold for $23,100 in March 2021. Pretty large difference.
All the same, there is potential for great profits in the collectables market, and that means potential for big taxes too. Collectables are taxed differently than stocks and bonds, but they do follow some of the same guidelines. The IRS defines collectables as:
- Any work of art,
- Any rug or antique,
- Any metal or gem (with limited exceptions, below),
- Any stamp or coin (with limited exceptions, below)
- Any alcoholic beverage, or
- Any other tangible personal property that the IRS determines is a “collectible” under IRC Section 408(m).
Similarly to stocks and bonds, the tax basis for gains is determined by subtracting the original cost basis (original purchase cost plus any costs, fees, or associated commissions) from the sale. If the collectible item is inherited, then the cost basis would be stepped up at death, so that an appraisal should be done at that point that could be relied on in the case of an eventual sale. The tax rate is also affected by the holding period. However, the rates are different and higher than for stocks and bonds, possibly because collectables are not considered primary drivers of the economy so they don’t receive quite as preferential a tax treatment.
The tax treatment for a short-term (ownership for less than one year) gain from a collectable sale will be as ordinary income. If the assets are held for over a year, they gain the preferential tax treatment of being taxed at a maximum of 28%, plus the 3.8% net investment income tax based on the taxpayer’s AGI.
Also, just as tax-loss harvesting may be worthwhile in a conventional portfolio, capital losses for collectibles might be deducted to a limited extent. However, if the collectible was used during its ownership (such as by displaying the painting in a personal residence), then the taxpayer would not be able to claim a capital loss.
So, the taxes on Anthony Giordano’s recent sale could end up as more than $3.5 million dollars, which last year could have bought the IRS the 5th, 6th, 7th, 8th, and 9th most valuable baseball cards with more than half the revenue still left.
Understanding the tax treatment of collectibles can be an important part of estate planning, especially for larger estates. The potential for sentimental value to particular or multiple family members also means the potential for misunderstandings. This can be addressed in a family meeting, and as part of the process of creating a larger estate plan. Should charitable giving be planned, understanding the tax strategies for all assets may make it possible to maximize the benefit for the charity and family by minimizing the tax burden of particular gains.
If you own collectibles and are concerned with how they will be handled in your estate plan, Garden State Trust Company’s Trust Officers would be pleased to share our experience.