For all you income tax dodgers, here’s some food for thought. Not easy reading if you already poured a glass. Not sure I’d call this a public service announcement.
Complex area of taxation and the shortened version is here. In general, you net collectible gains and losses for the calendar year. If the result is a net collectible loss, then the excess loss is carried forward and retains its character as a “collectible loss.” In essence, the collectible losses are sponges that absorb collectible gains. This may make it worthwhile for folks who like to declare such transactions to do it each year especially in the loss years - allowing a wave of wine loss to move to that big DRC gain in the future. Soak 'em up. (caveat: not a regular practice area for me. Seek your own tax wine geek advice before blessing your return.)
Maximum federal tax rate on the gain on collectibles held greater than one year is 28%, unless you are a dealer. Those collectibles held less than one year get ordinary income tax rates. The State takes some in a taxable state. Just so you dodgers know.
Watch out for the sales tax authorities. They like wine too. An “occasional sale” rule might give you a pass. Enough to make you want to drink. Not that you needed any prompting.
I’m not sure what you meant by this, Ian. If you were trying to say that treatment of gains as gains from collectibles is dependent on how or why the wine was acquired, that is incorrect. All alcoholic beverages are collectibles.
If you were trying to say that the reason for acquisition could cause the wine not to be a capital asset at all (in which case, the rate of tax on gains would not be capped 28%, but instead could be as high as the maximum 39.6% rate, depending on taxable income), that is technically true, but only, as described in my post up-thread, if the wine is business inventory or supplies. The examples you gave (death, divorce, etc.) would not prevent the wine from being a capital asset.
Investment purpose is generally relevant not to the tax rate on gains, but rather to whether you can deduct losses on bottles sold for less than their purchase price. If you purchase and hold for investment, then losses are deductible. If you purchase and hold for a mix of investment and personal purposes, then losses are not deductible.
Not exactly. Capital asset and collectibles are overlapping categories, not alternative categories, but status as a collectible only matters for capital assets. If the wine is a capital asset (as it almost always is), then the gain is taxed at the rates for capital gains on collectibles (maximum rate of 28% (ETA: for long-term gains, i.e., wine held more than one year)). If the wine is not a capital asset (ETA: or if it is held for a year or less), then gain would be taxed at ordinary income rates (up to a maximum rate of 39.6%).
Two caveats to this description. (1) As noted up-thread, losses on collectibles are not deductible (against collectible gains or otherwise) if the collectible is held for personal use. If you buy a case of wine, drink a couple bottles, and then decide to sell because the wine has appreciated in value or your tastes have changed, it may be difficult to show the wine was held strictly for investment and not for personal use. (2) Collectibles gain/loss is not separated from other capital gain/loss for purposes of carryovers. So you can offset all deductible capital losses against collectibles gain and, conversely, any net capital loss attributable to collectibles will just be carried forward as a capital loss and will offset capital gain of any kind in the first subsequent year for which there is net capital gain.
On your first question, generally no, losses are not deductible unless you can show that the wine was acquired solely for investment and not for personal use. If you collect in part as a hobby or if you drink some of the wine you buy, then the wine is likely personal use property.
On the second question, yes, shipping, sales tax, and other incidental costs of purchase are part of your tax basis in the wine, and are subtracted from the amount you realize on a sale in computing your gain or loss.
Matt,
Sincere question. Maybe I’m misunderstanding you, but the two bolded items seem to contradict each other. I was under the impression that capital losses on collectibles could be offset against capital gains (either from collectibles or other capital items, say stocks). I suspect it rides on the interpretation of personal use, correct?
Sorry for the delayed response; I was offline for a while.
You are correct that personal use drives the distinction between the non-deductible capital losses described in the boldface in my first caveat above and the deductible capital losses to which I refer in the boldface in the second caveat. You are also correct that collectibles losses can be offset against capital gains of all types (going further, they can also create up to $3,000 per of capital loss deductible against ordinary income), BUT this is only the case if the collectibles losses are deductible in the first place. If a collectible is held for personal use, then the loss when it is sold cannot be deducted or offset against gains.
How about the 100 pound elephant in the room with respect to auction houses. I mean are they supposed to report the sale of these items at auction? (wink, wink) Maybe sellers will receive a 1099W (W for Wine,) for the proceeds
I wouldn’t mind hearing the answer as to whether auction houses send a 1099.
What are we to do if we have been buying wine for the past 30 years and have not been saving receipts, and then sell a large number of wines at auction?
The responsibility is on the taxpayer. I have sold wine at auction and never received a 1099, I am sure that no one has. In fact, I think it is a safe bet that there are zero auction houses that report sales information. Not sure how it relates to art pieces though