Collectible or not

[MarkCTX]

Client purchased an M-16 rifle in the 80's for around $900. He recently sold it to a collector for over $20K. Capital gain comes to mind, but is this gun a collectible? M-16 is not an antique, nor scarce. This gun sat in a bag in a closet and never displayed or shown at a gun show. There are gun collections and gun collectors, but where do we draw the line?

Mark C.

[Bob McCoy]

Just going off the top of my head, so if any of the more abundantly more knowledgeable posters disagree, feel free to step forward. I hearken back to the days when there were notable bubbles such as the Beanie Baby, or Cabbage Patch Doll. A $5.95 Princess Di Bear could sell for in excess of $500 in the secondary market. They were certainly not old, nor all that rare, but at the time highly collectable to a segment of the population. Could give other examples for highly sought after sports trading cards, where they were neither old nor rare.

If someone is willing to pay 20k for a gun, that seems fairly collectable. Plus there are other factors that can make something collectable.

[Roland Slugg]

I believe it's a fairly close call, but based on what you wrote in the OP, I would not treat the gain as a 28% "collectibles" sale. Here is why I say that ....

The IRS definition of "collectibles" is fairly short ... and rather vague in one important aspect. Everyplace I have found its definition it says this:

Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible property.

A 35-year old gun would probably not be considered an antique, and it's none of the other things specifically listed, but what about that last item ... "certain other tangible property?" That catch-all term could be used to describe almost anything the IRS may wish to snag. Even though it says certain other tangible property, there is no certainty at all regarding what it includes ... at least I have never seen any.

The wording of your post seems to imply, or at least I inferred, that your client was not a gun collector, even though he sold the gun to a gun collector. Rather, he simply bought the gun when it was new, held onto it the whole time, and was probably surprised that it became worth as much as it did. I would draw a similarity to someone who, as a young man, bought a 1965 Mustang when it was new, drove it a little every year and maintained it in good condition, and now 50 years later finds that it's worth $30k. If he's not a car collector, but just someone who keeps his prized personal belongings a long time, then his Mustang is not a "collectible" in his hands, and he should be entitled to the normal capital gain tax rate upon its sale.

If your client fits this profile, I would not classify the gun's sale as a collectible. Warn your client, though, that the IRS may challenge that treatment, and he will have to deal with that issue if it does.

P.S. When I read the IRS's definition of "collectibles," I always smile when I see the term, "alcoholic beverages." Why don't they just say "wine collections?"

[Bob McCoy]

Interesting topic to expand on, not ultra crucial in the grand scheme of the universe or even to the forum for that matter, but I have all my work done for today, so I have just a bit of extra time.

Say a person has a whole barn full of collectables, but no specific collection, more or less has one of everything. Say back in the eighties, that Slash (famed guitarist from GNR) gave this person his top hat. Given his induction into The Rock And Roll Hall of Fame, hat is now considered valuable. However the person is not a top hat collector, as this is his only top hat, just a collectable collector. Would the top hat constitute a collectable?

One could argue yes since the hat was owned by a famous person, or in other words contained a unique attribute which made it valuable. In the case of the gun, one could ask why the spike in value? Was there something unique about it also , or perhaps the collector simply over paid? Unless the collector was fleeced in broad daylight, you would have to ask what made the gun so valuable now relative to its value then?

[taxea]

An M16 rifle could well be a collectible. I would have the client explain why the buyer was willing to spend so much for it. Did he have an appraisal done? Where and how did he determine the current value?