Cashing in on collections

Collectibles can appreciate in value, but are they a solid investment?

Have you invested in a personal hobby that’s grown into something more? Collections often start from a place of passion – an appreciation for fine wine, the sleekness of sports cars or the beauty of art sculptures. They represent something about ourselves, our interests, our personality.

From an investing perspective, collectibles are items that might be expected to appreciate in value, objects that often are worth more today than when they were last purchased. They’re considered “alternative investments,” and their value is dependent on the level of demand of potential buyers. Beyond the joy they provide you, they can also be passed on when the time comes.

Sales of global collectibles are expected to grow to $692 billion from $412 billion over the next decade, according to market research. But before you jump in, you should understand both sides of the coin.

Advantages and disadvantages

Anyone interested in investing in collectibles should understand the potential risk. Collecting can be exciting and rewarding, especially if you have a connection with the items, but there’s no guarantee you’ll even break even when you sell. Collectibles have no intrinsic value; the value is solely determined by a potential buyer’s willingness to pay. They possess less liquidity than traditional investments because a sale is dependent on finding a buyer.

If you’re interested in starting (or growing) a collection, in-depth research and due diligence is necessary. Beyond the risk that the item may not result in profit, there are other dangers like buying an inauthentic item or overpaying for a piece. Each collectible niche has its own nuances, and if you’re going to invest, you must be confident in your knowledge.

It can be gratifying to add physical assets to your investments, and collectibles can accomplish this. Doing so allows you to follow your personal interests and enjoy building a collection you’re proud of. Because they can be touched and moved, of course, there’s the risk of damaging your collectible over time and losing value. If you build a collection, you’ll want to consider where it will be stored to be kept safe and whether you should insure the items.

Nostalgia plays a part in a collectible’s value, and these feelings tend to cycle every couple of decades. People may be seeking connection to their past by collecting items that are reminiscent of their childhood, for example, like comic books, vinyl records or wooden toys. Collections can also a special way to pass down a lifelong passion to family members and future generations. (Be sure this is part of your estate planning conversation if passing your collection down is a motivator.)

Taxes on collectibles

Tax is also a significant factor in determining if collectibles are a viable investment option. Sales of collectible items are taxed heavily. Capital gains taxes clock in at a whopping 28% if you hold the collectible for more than a year, compared to just 15% for other long-term capital gains taxes. If you hold the item for less than a year, it’s taxed at your ordinary income tax rate. Collectibles are also subject to a 3.8% net investment income tax depending on your adjusted gross income (AGI).

From a tax standpoint, there are options other than selling – like donating an item to charity or claiming a capital loss. However, if you decide to donate an item to charity, anything with a value greater than $5,000 must be appraised, and the receiving charity must sign a noncash charitable contribution form and hold on to the item for at least three years. In terms of claiming a capital loss, if you use the item personally, like hanging a painting on your living room wall, any loss is considered a nondeductible personal loss, not a capital loss.

Unlike traditional investments, the value of the collectible is in the eye of the beholder. While collectibles can bring great joy to you personally, they can be a riskier investment. Understand your collectible investments by doing your due diligence on each item before you add it to your collection, and consider the enjoyment of collecting as part of the equation.

Sources: barrons.com; investopedia.com; forbes.com