Depending on the coin collection you inherit, you could see your net worth shoot up and start wondering if the Internal Revenue Service is going to tax you. Just inheriting coins won't trigger any federal taxes, but you could owe state inheritance taxes, and selling them could trigger income taxes.
The federal government only imposes an estate tax, not an inheritance tax, which means that the federal tax is paid by the decedent's estate. Some states, on the other hand, impose their own inheritance tax which you would be required to pay just by virtue of inheriting the coins. For example, Pennsylvania imposes an inheritance tax in the form of a percentage of the value of a decedent's estate. Rates vary depending on your relationship to the decedent. Spouses and children under 21 don't pay the tax, direct descendants pay 4.5 percent, siblings pay 12 percent and unrelated people pay 15 percent.
Coin Collection Basis Step-Up
When you inherit property, your basis -- what your taxable gains are based on when you sell that property -- is set at the fair market value of the items when the decedent died. If the decedent had the coins for a long time before dying, this could be a substantial savings. For example, if your grandfather started collecting coins when he was young and paid only $300 for his collection, but the coins are now worth $5,000, your basis is set at $5,000. Therefore, if you turn around and sell them for $5,000, you won't pay any taxes because even though the coins are worth $4,700 more than what your grandfather paid, the step-up in basis leaves you with no taxable gains because your basis equals the sales price.
No Income Taxes Until Sales
No matter how much the coins continue to increase in value, you won't recognize any of those gains on your taxes until you actually sell them. For example, if one of the coins in the collection becomes really popular and increases in value by $100, you won't owe taxes based solely on its appreciation in value. However, once you sell it, you have to pay taxes on the amount by which your selling price exceeds your basis. For example, if you sell a coin that was worth $50 at the decedent's death and sells for $150, you have $100 of taxable income.
Coins are collectibles, which means that even though the profits are long-term capital gains, you don't usually qualify for a lower tax rate. Instead, the gains on the coins are taxed at either 28 percent or your marginal tax rate, whichever is lower. For example, if you fall in the 25 percent tax bracket, you'll still pay the 25 percent tax rate on your gains from selling the inherited coins. But if you're in the 33 percent bracket, your coins will only be taxed at 28 percent.
- Forbes: Where Not to Die in 2013
- Pennsylvania Department of Revenue: Inheritance Tax
- IRS: Publication 550 -- Investment Income and Expenses
- IRS: Topic 409 -- Capital Gains and Losses
- Legal Information Institute: 26 USC 1223
- Legal Information Institute: 26 USC 1
- J.K. Lasser: Gains and Losses on Collectibles
- Jupiterimages/Photos.com/Getty Images