Q: My hobby of collecting comic books has become quite the collection. I know collectibles can appreciate in value, but are they a solid investment?
A: Collections often start from a place of passion – they represent something about ourselves, our interests, our personality.
From an investing perspective, collectibles are items which might be expected to appreciate in value. They’re considered “alternative investments,” and their value is dependent on the level of demand of potential buyers.
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 is no guarantee you’ll even break even when you sell. Collectibles have no intrinsic value.
If you are 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.
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 reminiscent of their childhood, for example, like comic books, vinyl records or wooden toys.
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.