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1(h)(5)(A) provides that a collectible gain or loss means a gain or loss from the sale or exchange of a collectible that is a capital asset held for more than a year. Collectible gains, the focus of this article, are subject to a maximum rate of 28%. The final category of capital gains is collectibles. These gains are subject to a maximum 25% rate. The second category of capital gains is unrecaptured Sec. These gains include capital gains other than capital gains in the other two categories. The first category, and most common, is capital gains subject to a rate of 0%/15%/20%, depending on the taxpayer's taxable income exclusive of these gains. Under the current tax system, there are three categories of capital gains. The challenge for the drafters of the legislation in applying the higher tax rate for collectibles was in defining the term "collectible." 3They further maintained that taxing collectible gains at a higher rate produced desired vertical tax equity while still being politically palatable. 2 Those in favor of taxing collectible gains at a higher rate than other capital gains argued that collectibles were mostly owned by the wealthy and that gains from those collectibles neither motivated innovation nor stimulated economic growth. However, in passing capital gains tax reform as part of the TRA, Congress defined collectibles separately and chose to leave the maximum rate assessable on collectible gains at 28%. Afterward, the maximum tax rate on net capital gains was reduced to 20% for gains on most capital assets. Before the Taxpayer Relief Act (TRA) of 1997 was enacted, 1 the entire amount of net capital gains was taxed at a maximum rate of 28% with no distinction made for the type of long-term capital gain. Since 1997, the distinction between a collectible and other types of capital assets has mattered for purposes of the capital gains and losses netting process and the tax rate on net capital gains (excess of net long-term capital gains over net short-term capital losses).
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This article assists tax practitioners in understanding the definition of collectibles for tax purposes, explains how gains from collectibles are taxed, and provides practical strategies that taxpayers can use to lower their tax burdens on collectible gains.
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Finally, the applicable tax rate for net collectible gains is different than for other capital gains and losses. Second, the netting process for collectible gains and losses is more complicated than it is for typical capital gains and losses. First, the tax definition of collectibles is complex and can easily be misinterpreted. The federal income taxation of gains (and losses) from the disposition of investments in collectible assets (collectibles) is relatively unfamiliar to many practitioners for several reasons.