If you’re a collector, keep good records so you know your basis for each item.
Casualty-loss deductions. In case of fire or theft, your tax deductions will be limited to your basis in the affected items. If you can’t prove your basis, you won’t be able to sustain those deductions.
Insurance proceeds. Similarly, insurance proceeds for any stolen or destroyed items will be treated as a taxable gain to the extent they exceed your proven cost basis. If you lack proof, all of the proceeds may be taxable.
Basis step-up. Good records may help your loved ones, too. Under current law, whoever inherits will receive a basis step-up to current market value.
For example, say you bought a painting for $6,000 and you hold it until death, when it’s worth $20,000. Your heirs can sell it for $20,000 and owe no capital gains tax. (The full value will be included in your taxable estate, though.) Thus, if you inherit collectibles from anyone, you should have them appraised right away, to establish a new basis, for all the reasons mentioned above.
On the other hand, when collectibles are given away their original basis goes with them. If you give that $6,000 painting to your son, for example, his basis will be $6,000 and he’ll owe tax on a $14,000 gain, if he sells it for $20,000. Again, if you’re given collectibles, find out what the giver’s basis was and collect documentation, if it’s available.
