How ‘found’ property is taxed

Maki_shmaki | Istock | Getty Images

Consider this a public service announcement for all treasure hunters: Uncle Sam wants a piece of your loot.

Someone who makes a valuable discovery — whether gold coins, meteorites or even cash — generally owes tax on that haul, which is known as “found” property.

The tax is twofold: a levy upon acquisition and, if eventually sold, on the profit.

Its taxability is due to a basic premise of tax law: Income is taxable unless the Internal Revenue Code excludes it from taxation or allows for a tax deferral, said Troy Lewis, an associate professor of accounting and tax at Brigham Young University.

More from Personal Finance:
How to leverage 0% capital gains with this lesser-known tax strategy
Lawmakers weigh tax rule ‘backslide’ for Venmo, PayPal users
IRS unveils ‘paperless processing initiative’ for taxpayers

“Is there a treasure-hunter exclusion?” Lewis said. “No, there’s nothing like that.

“As a result, it’s ‘miscellaneous income.'”

The haul would therefore be taxed at ordinary-income tax rates. These tax rates (which also apply to income like job wages) are up to 37%.

How cash in an old piano established taxation

The taxation of found property has its roots in a court case from the 1960s, according to TurboTax.

A married couple — Ermenegildo and Mary Cesarini — bought a used piano in 1957. Seven years later, when cleaning the instrument, they found $4,467 of old currency inside. The couple, who exchanged the currency for new notes at a bank, paid $836 of income tax on the find but later requested a tax refund, claiming it wasn’t taxable income. A federal judge rejected the premise, siding with the IRS in federal court.

Valuable discoveries happen more often than you might think.

How tax money is wasted in the U.S.

For example, in June, a man found more than 700 Civil War-era gold coins in a Kentucky cornfield, a treasure that may reportedly be worth more than $1 million. In April, after a meteorite landed near the U.S.-Canada border, a museum in Maine offered $25,000 to anyone who found a piece of the rock weighing at least 1 kilogram. In 2020, a Michigan man found $43,000 stuffed in a donated couch.

The same tax concept also applies to sports memorabilia — say, catching Derek Jeter’s 3,000-hit ball or Tom Brady’s 600th touchdown pass — or winning a car on a game show.

Legal ownership starts the clock

There are some caveats. For one, there may be questions of legal ownership: Does the discovery truly belong to you?

“When you have a legal right to the property you find, that becomes Tax Day,” said Lewis, who also owns an accounting firm in Draper, Utah.

This could become a challenge for taxpayers who don’t have the money on hand to pay perhaps hundreds or thousands of dollars in income tax, Lewis said.

The date of legal acquisition also starts the clock relative to one’s holding period and cost basis (i.e., value), he added.

These become important if the finder later sells the object. That’s because tax code offers preferential tax rates on profits from investments and other property like collectibles that are held for more than a year. (In such a case, taxes on “long-term” capital gains would kick in.) If held for a year or less, those preferential capital gains tax rates disappear.

Many found items, like gold coins and meteorites, would likely be considered collectibles, Lewis said. Federal long-term capital gains taxes on collectibles can go as high as 28%, while those on other assets like stocks and real estate can reach 20%.

Source link

Share with your friends!

Leave a Reply

Your email address will not be published. Required fields are marked *

Get The Best Financial Tips
Straight to your inbox

Subscribe to our mailing list and get interesting stuff and updates to your email inbox.

Thank you for subscribing.

Something went wrong.