Tax Tips for Collectors, Investors, and Dealers

The tax implications of buying and selling tangible personal property such as art, coins, and classic cars are more complicated than they appear. At its most basic level, the motivations and actions of the taxpayer shape the tax consequences.

When buying and selling these types of items, an individual can act as a collector, an investor, or a dealer and the tax implications are different for each. The lines between these categories are not exactly clear and the treatment can be different for each transaction.

Collecting For the Enjoyment of Owning

A collector is an individual who buys tangible property primarily for the purpose of personal enjoyment and pleasure. This individual does not buy and sell in a businesslike manner and does not have a profit motive first and foremost. As an end-user of the goods, the collector pays sales tax on his or her purchases. From an income tax perspective, deductions such as insurance, upkeep and storage are significantly curtailed under the Section 183 hobby loss rules, while net losses are not allowed at all. Gains, however, are taxable and are subject to preferential long-term capital gains rates if the property is held for more than one year. Note that collectibles held long-term are taxed at a rate of 28% plus the 3.8% surtax.

A Dealer Who Loves to Trade

A dealer is an individual engaged in the trade or business of selling personal property. To be considered in a trade or business, the individual’s activity should consume a significant amount of time and generally sustain his or her livelihood. There should be substantial and continuous selling activity where profit is the primary motive. A dealer generally does not pay sales tax on his or her purchases as these purchases constitute inventory and are held for resale. From an income tax perspective, all business related costs are deductible, but sales of appreciated property do not qualify for the preferential long-term capital gains tax rates. Rather, all income is taxed at applicable ordinary income rates (currently 39.6%). Losses on sales are deductible against other income.

Investing Over the Long Haul

An investor is a person who buys and sells property with a profit motive in mind, but whose activity does not rise to the level of a dealer. The investor is more interested in capital gains from long-term appreciation as opposed to rapid gains from turning over property quickly. While investors do pay sales tax on purchases, they enjoy the right to deduct expenses relating to the item. Expenses, however, are considered investment expenses and are itemized deductions that can be deducted to the extent they exceed 2% of adjusted gross income. As with collectors, qualifying sales are taxed at the preferential long-term capital gains rates. Unlike collectors however, investors can claim capital losses and 2% deductions, as limited.

Why One Category Over Another

It is not uncommon for a taxpayer to claim one status over another because of the potential for a reduced tax burden. For instance, a collector may wish to avoid a disallowance of losses by claiming the status of investor. An investor may wish to claim the status of dealer if he or she wishes to deduct losses against ordinary income rather than generate potentially unusable capital losses. A dealer, alternately, may want to claim the status of an investor or collector to utilize the long term capital gains tax rates as opposed to generating ordinary income.

What Do the Courts Have to Say?

The courts have provided guidance regarding how they evaluate which category a taxpayer belongs in. There are a number of factors that the courts examine and no single criterion is in and of itself determinant.

  1. Frequency and Regularity of Sales
    The first and one of the more important factors that a court will evaluate is the frequency and regularity of sales. Typically, a large volume of sales would suggest that the taxpayer is involved in dealer activities. Investors and collectors do not sell large volumes on a regular basis. Their sales are more isolated and intermittent.
  2. Substantiality of Sales
    Another important factor is the substantiality of sales. Sales that generate large profits as a result of capital appreciation as opposed to the taxpayer’s efforts are more indicative of an investor or collector than a dealer. This factor is looked at in conjunction with the previous factor to get a sense of how often the individual conducts sales and the size of the profit.
  3. Duration of Ownership
    In general, the longer that a piece of property is held, the more likely that it is being held by a collector or investor than a dealer. Dealers tend to turn over their inventory quickly. Investors and collectors usually hold property for the long term.
  4. Sales and Advertising Effort
    Dealers, by their nature, hold their property for sale and primarily derive their income from the profits so they put significant effort into sales and advertising activity. Investors and collectors usually do not conduct regular sales efforts. They often will have unsolicited sales or only put effort into selling once they have decided their objectives have been met.
  5. Intent at Acquisition
    The courts will evaluate the original purpose of each acquisition. This does not preclude the owner from changing their intent during the holding period, but additional evidence will be needed to support the reason for the change. A dealer’s intent is to sell property quickly and for a profit. The investor will have a longer term horizon for making a profit. The collector will primarily buy an item for their personal enjoyment and pleasure with a limited profit motive.

    It is important to note that a taxpayer can be in more than one category with respect to buying and selling similar property. For instance, a coin dealer can be a dealer with respect to coins sold by his business, but an investor in coins that he or she owns separately.
  6. Segregation of Property Comingling of dealer property with investment and collector property will weigh heavily against a taxpayer seeking favorable treatment. Segregation physically and the maintenance of separate records will help to demonstrate the divergent intents of the taxpayer with respect to the separate items sold. Keeping investments in secure storage, collection items on display in your home, and business inventory in a store will help illustrate how the taxpayer has different intents with each item.


Though none of these criteria is in and of itself conclusive, assessing the factors together leads to a determination of which status is most applicable. Even in complex situations where a taxpayer may claim multiple statuses, proper planning on the part of the taxpayer can lead to favorable tax results. Because of the nuanced criteria involved, it is advisable to consult with a tax expert to provide the greatest chance for the desired tax status.