IRC 1(h)(4): The 28% Rate Explained

Collectibles receive distinct treatment under the federal capital gains rate structure. The general long-term capital gains rates that apply to most assets, including stock and real estate held more than a year, are 0%, 15%, or 20%, depending on total taxable income. Collectibles face a higher ceiling.

IRC section 1(h)(4) imposes a maximum rate of 28% on net long-term capital gains from collectibles. The IRS describes this in Topic No. 409, Capital Gains and Losses, which states that net capital gains from selling collectibles such as coins or art are taxed at a maximum 28% rate.

Several important details about how the 28% rate operates:

  • It is a maximum, not a flat rate. A taxpayer whose ordinary income rate is below 28% is taxed at that lower rate on collectible gains, not at 28%. The statute creates a ceiling, not a floor.
  • It applies to net long-term gains. The 28% rate applies after netting long-term gains and losses from collectibles. Losses from collectible sales can reduce the taxable gain.
  • It applies on top of the general rate structure. Taxpayers in the 0% or 15% general long-term capital gains bracket will be taxed on collectible gains at their ordinary rate if that rate is below 28%, or at 28% if their ordinary rate is at or above that level.
  • The definition of collectibles is statutory. IRC section 408(m) defines collectibles for tax purposes, and that definition includes works of art, rugs and antiques, metals and gems (with exceptions for certain IRA-eligible precious metals), stamps and coins (with exceptions for certain US-minted coins), alcoholic beverages, and any tangible personal property specified by IRS regulations.

Short-Term vs. Long-Term Treatment

The 28% maximum rate applies only to net long-term capital gains, meaning gains on collectibles held more than one year before sale.

A collectible held one year or less produces a short-term capital gain. Short-term gains are taxed at ordinary income rates, which under current law can reach 37% for the highest income bracket. There is no special lower ceiling for short-term collectible gains the way there is for long-term gains; the ordinary income tax brackets apply.

The practical consequence is that for taxpayers in higher income brackets, a short-term collectible gain can be taxed at a rate above 28%. Holding an item for more than one year can reduce the federal tax rate on the gain substantially. The one-year threshold is identical to the holding period that distinguishes short-term and long-term treatment for other capital assets.

Losses from collectible sales are netted against gains before determining the taxable amount. If collectible losses exceed gains, the excess loss is subject to the standard capital loss rules applicable to all capital assets.

Net Investment Income Tax

The Net Investment Income Tax (NIIT), enacted as part of the Affordable Care Act, imposes an additional 3.8% tax on net investment income for taxpayers whose modified adjusted gross income exceeds certain thresholds. For 2026, those thresholds are $200,000 for single filers and $250,000 for married taxpayers filing jointly.

Net investment income includes net capital gains, which in turn includes capital gains from collectible sales. For a taxpayer above the NIIT threshold, long-term collectible gains face both the 28% long-term rate and the 3.8% NIIT, for a combined maximum federal rate of 31.8% on long-term gains.

Short-term gains from collectibles, which are taxed as ordinary income, are also included in net investment income for NIIT purposes when received by a passive investor rather than an active dealer. The interaction between ordinary income rates, the 28% ceiling, and the NIIT produces a range of effective federal rates depending on the taxpayer's total income and filing status. A qualified tax professional is the appropriate source for the rate applicable to a specific situation.

State Taxes

Federal tax is not the complete picture. Most states with an income tax impose their own tax on capital gains, and most states do not provide the same preferential rate treatment that federal law provides for long-term gains. Many states tax capital gains at the full state ordinary income rate regardless of holding period.

State tax treatment of collectibles does not uniformly follow the federal definition or the federal rate structure. Some states treat all capital gains the same; others have specific provisions. A handful of states have no income tax at all. The combined federal and state effective tax rate on a collectible gain can substantially exceed the 28% federal maximum, particularly in high-tax states.

Planning the tax impact of a collectible sale requires accounting for the applicable state and local taxes in addition to the federal calculation. This is a situation that warrants qualified tax advice for any significant gain.

Cost Basis Tracking

The taxable gain on the sale of a collectible is the difference between the amount realized and the adjusted cost basis. Accurate basis tracking directly reduces taxable gain, so it has real economic value.

The cost basis of a purchased collectible generally includes:

  • The purchase price (hammer price plus buyer's premium at auction, or full price from a dealer)
  • Directly related acquisition costs such as shipping, insurance for transit, and import duties
  • Authentication and grading fees at the time of purchase, if capitalized
  • Improvements that add to the item's value, such as certain conservation work, if they meet the test for capitalization under the applicable rules

Annual carrying costs such as storage and insurance for personal-use property generally cannot be capitalized into basis. For collectibles held as investment property rather than personal-use property, some expenses may be deductible as investment expenses under applicable rules, but these rules have been modified by tax legislation in recent years and the current treatment should be confirmed with a qualified tax advisor.

Physical documentation to support basis includes original purchase receipts, auction records, grading certificates with acquisition dates, and correspondence related to the purchase. Because collectibles are often held for many years and original records can be lost, maintaining organized records from the date of acquisition is genuinely important.

Charitable Donation of Appreciated Collectibles

Donating an appreciated collectible to a qualified charitable organization can provide a tax benefit that avoids recognition of the capital gain while generating a deduction based on the item's fair market value at the date of donation.

The general rule for donating appreciated long-term capital gain property to a public charity is a deduction equal to fair market value, subject to a limitation of 30% of adjusted gross income for contributions of capital gain property to most public charities. Excess deductions carry forward for up to five years.

Several conditions and exceptions apply:

  • Related use requirement. If the donated property would have produced long-term capital gain if sold, and the charity uses the property for purposes unrelated to its exempt purpose, the deduction is limited to the donor's basis rather than fair market value. Art donated to a museum that exhibits it satisfies related use; art donated to a medical charity that sells it may not.
  • Qualified appraisal required. The IRS requires a qualified independent appraisal for any donated property with a claimed value over $5,000. The appraisal must be performed by a qualified appraiser no earlier than 60 days before the donation and no later than the tax return due date. IRS Form 8283 must be attached to the tax return.
  • Art valued over $20,000. Donations of art valued at $20,000 or more require a complete copy of the appraisal attached to the tax return.

The IRS's Publication 561, Determining the Value of Donated Property, describes the valuation standards and the qualified appraisal requirements in detail.

Frequently Asked Questions

What is the federal tax rate on collectible gains?

The IRS states in Topic No. 409 that net capital gains from selling collectibles, such as coins or art, are taxed at a maximum 28% rate. This contrasts with the general long-term capital gains rules, under which most net capital gain is taxed at no more than 15% for most individuals, with some or all potentially taxed at 0% depending on taxable income. The 28% rate is a ceiling rather than a flat rate: a taxpayer whose ordinary income rate is below 28% is not pushed up to it.

Does the holding period affect collectible tax treatment?

Yes. The maximum 28% rate applies to net long-term capital gains from collectibles, meaning gains on items held more than one year. A collectible held one year or less produces a short-term capital gain, which is taxed as ordinary income at the taxpayer's marginal rate. Because ordinary income tax rates can reach 37% under current law, short-term collectible gains may be taxed at a higher rate than the 28% maximum that applies to long-term gains.

Does the Net Investment Income Tax apply to collectible gains?

The Net Investment Income Tax of 3.8% applies to net investment income of taxpayers whose modified adjusted gross income exceeds certain thresholds: $200,000 for single filers and $250,000 for married filing jointly, under current law. Net capital gains from collectibles are generally included in net investment income for this purpose. For taxpayers above the threshold, the effective maximum federal rate on long-term collectible gains would be the 28% long-term rate plus the 3.8% NIIT, for a combined maximum of 31.8% federally, before any applicable state tax.

How is cost basis calculated for a collectible?

Cost basis for a purchased collectible is generally the total amount paid to acquire it, including the hammer price plus buyer's premium at auction, or the purchase price from a dealer, plus directly related acquisition costs such as shipping and insurance for transit. Restoration or conservation costs may be capitalized into the basis or may be treated as expenses depending on their nature. Accurate records of purchase price, date, and all acquisition costs are essential because they reduce the taxable gain at the time of sale.

What is the tax benefit of donating an appreciated collectible to charity?

Donating a collectible held more than one year to a qualified public charity generally allows the donor to deduct the fair market value at the date of donation, subject to limitations based on the donor's adjusted gross income. This avoids recognizing the capital gain that would have resulted from a sale. A qualified independent appraisal is required by the IRS for donations of property valued over $5,000. The rules for art donated to a museum for related use differ from donations to charities whose use of the property is unrelated. IRS Publication 561 and Publication 526 cover these rules.

Are losses on collectibles deductible?

Losses on collectibles held for investment are generally deductible as capital losses, subject to the usual capital loss limitation rules: capital losses offset capital gains first, and up to $3,000 of excess capital losses can offset ordinary income per year, with the remainder carried forward. However, losses on collectibles held for personal use and enjoyment, rather than for investment, are not deductible. The distinction between investment and personal use is a facts-and-circumstances determination.

References

This content was prepared by the Swoopr Editorial Team in September 2026, based on IRS publications available at that time. Tax law can change; verify current rules directly with the IRS or a qualified tax professional before making any tax decision. Nothing here is personalized tax advice.