Don't Mess With Taxes

Happy New Year! No, I haven't hit a time warp, although that could be cool! But I digress.

Today is the start of the Year of the Monkey.

Although 2016 is the Year of the Monkey, Chinese New Year parades still tend to be led by dragons.

The Lunar New Year that began today is the biggest holiday in China. Thanks to the large communities of Chinese heritage throughout the world --- and because folks will jump at any chance to party -- it's a festive time worldwide.

Although China officially operates on the international Gregorian calendar, the traditional lunisolar calendar maintains ceremonial significance. Each new year is assigned an animal per a rotating zodiac of 12: rat, ox, tiger, rabbit, dragon, snake, horse, goat, monkey, rooster, dog and pig.

Monkey business: The dozen animals in the Chinese zodiac return periodically. Previous primate celebrations were in 1920, 1932, 1944, 1956, 1968, 1980, 1992 and 2004. The next Year of the Monkey will be in 2028.

People born in the Year of the Monkey (like me! I'll just let you guess which year is mine) are characterized as witty, curious, playful, smart, clever and intelligent, especially in career and wealth matters. (Blushing a bit.)

Those traits mean it also is a good year to take a chance or start a business. Or, as Chinese astrologists recommend, run with ideas, embrace the inventive and don't look back.

1980 definitely was a good year for collectors who bought a special stamp commemorating that Year of the Monkey. Back then, it sold for 8 yuan, or around 1 U.S. cent.

A single 1980 monkey stamp now is worth around 12,000 yuan, or about $1,630 in U.S. dollars, according to one estimate.

A story in Antique Trader in 2012 reported that a full sheet of 80 post office-fresh Year of the Monkey stamps purchased in 1980 at a People's Republic of China postal facility sold for $135,600. That comes to $1,695 per stamp.

A quick eBay search today finds various Chinese monkey stamps being offered by collectors from $1,500 to $2,400.

Despite the price fluctuations, all of those value estimates still offer a very nice return on any philatelist's penny investment.

Low, but not lowest, capital gains rate: Even better, any profit by a U.S. seller would be taxed a lower capital gains rate.

But the applicable capital gains rate is not the commonly referred-to rate of 15 percent for most of us or 20 percent for wealthier investors.

Collectibles are taxed at 28 percent, as long as they are held for more than a year, making them a long-term capital investment.

This collectibles' tax rate applies to taxpayers in the ordinary tax brackets of 28 percent, 33 percent, 35 percent or 39.6 percent. If you're in the 10 percent, 15 percent or 25 percent ordinary income tax bracket, you'll effectively pay those rates since they are lower than the 28 percent collectibles rate.

The reason, note the tax folks at J.K. Lasser, is because the capital gains rate is the maximum rate. It cannot exceed the overall rate paid by a person on taxable income.

Note, however, that if your collectible produces a lot of money upon its sale and you're in one of the lower tax brackets, the item's profit could push you into a higher bracket where the 28 percent capital gains rate would be a break.

Capital gain tax differences: Why the special, higher rate for collectibles? The public policy argument for a different, and less advantageous, tax rate for profit on collectibles is that such sales don't have any broader economic impact.

True, culturally society benefits from preservation of works of art, antiques and other collectibles. But, goes the tax argument, there isn't a larger-scale economic gain on investment in collectibles like we often see from investments that produce innovative techniques, new products and higher productivity.

So Uncle Sam rewards those more economically focused long-term investments that benefit the country's gross domestic product with lower capital gains tax rates.

Defining a collectible item: What exactly is a collectible? The short, and some might say smart-ass, answer is simply that it's an item worth collecting.

Here are some things that for tax purposes (and noted in the instructions to the Internal Revenue Service's instructions for Schedule D, where you report capital gains) are typically considered collectibles:

Art
Gems
Rugs
Rare stamps
Rare coins
Rare books
Precious metals
Baseball cards
Glassware
Antiques
Fine wine

Figuring your tax: As with all investments, you're taxed on the profit. That's what you sell it for minus its basis.

Basis begins with your acquisition cost, which for collectibles generally include auction and/or broker's fees along with what you paid for the item.

If you inherited the collectible, your basis is the item's fair market value at the time of bequeathing owner's death.

Note, too, that if your collectible item requires special care, for example, added costs to maintain the piece or restore it, those expenses also are part of your basis in the collectible.

What you get when you sell the item, less the accumulated basis, is the amount upon which you'll owe taxes at 28 percent.

That rate, of course, is if you sell it more than a year after buying or inheriting it. As with all capital gains calculations, if you sell a collectible you've owned for a year or less, your profit is taxed at your ordinary income rate.

You also might find these items of interest:

• The intersection of art, bartering and taxes
• Estate gets $14 million tax refund on value of art
• IRS deal means museum home for 'Canyon,' no tax bill for former owners