What to Expect When Trading Collectibles in Foreign Auctions
By Alan Olsen, CPA, MBA (tax)
Greenstein Rogoff Olsen & Co. LLP
For many people with an abundance of money, collecting goods like fine art is a popular pastime. However, no matter what kind of goods you collect or trade you will always have to be aware of the tax side of your hobby. Many people buy, sell and trade collectibles in foreign auctions, which can be very satisfying. However, there are some tax issues that you need to be aware of when you deal with collectibles in foreign auctions.
Taxes on Collectibles
Of course, as with anything else, the tax collector is always looking for his fair share. However, if you are dealing with collectibles, like fine art, there are three different classifications you should be aware of. Whichever classification you fit in will play a huge factor in determining your overall tax bill.
Which Classification Are You?
So the first thing you need to do is determine whether you are a collector, a dealer or an investor. Let’s take a look at the differences.
Collector – anyone who simply buys art as a hobby is considered to be a collector by the IRS. That means a collector’s assets are mainly for the purpose of enjoyment and not for making a profit. A collector pays state and local sales tax because he or she is not buying for resale. The collection is considered a capital asset by the IRS and not as inventory.
Dealer – unlike a collector, a dealer is actually in it for the purpose of selling art. Being a dealer can mean deducting business expenses, but the dealer has to prove that he or she is actually a dealer. Proving that you’re a dealer is not always easy, especially if you have business income from other sources. In that case, the IRS might deem your collecting as a hobby. Typically private dealers are full-time and don’t have other income sources. It’s also important to have proof of both purchases and sales, in order to prove you are a dealer.
Investor – being considered an investor for tax purposes is the most complicated classification to obtain because an investor gets both the benefits of being a dealer and a collector. In order to be considered an investor, a person must show that his or her primary interest is in making a profit from the sale of the collectible. Although an investor can enjoy art, he or she needs to be willing to sell it. Also, an investor’s art collection will not typically be on display at his or her home.
Can’t Escape the IRS
Whether you buy, sell and trade your collectibles in the U.S. or overseas in foreign auctions, you have to be current on your tax bill. The IRS will always want its share of any profit made. Even if you are mostly dealing in foreign auctions, you will still be required to report your worldwide income on your U.S. tax return, including any online auction sales to foreign customers. In other words, no matter where you make your money, the IRS wants to know about it.
Get Professional Help
Whenever you are dealing with collectibles in foreign auctions, the tax implications can be complicated. That’s why working with an experienced and knowledgeable tax firm can be a great help. At GROCO we understand how these different tax issues can affect you and we can help you get the most out of your investment. Contact us to learn more.