Borrow or Sell? The Tax Math on Art, Watches and Collectibles

Selling a collectible you have held for more than a year can cost up to 28% in federal capital gains tax, plus a 3.8% net investment income tax for higher earners, plus state tax. That is higher than the 20% top federal rate on stocks. Borrowing against the same asset creates no sale and no tax bill, so for short-term cash needs it can cost less than selling. Whether it does depends on your gain, your bracket, the loan's cost and how long you need the money.

This guide walks through how collectibles are taxed, a side-by-side example, the break-even point between borrowing and selling, and the cases where selling is still the better choice.

How are collectibles taxed?

The IRS treats art, antiques, gems, stamps, coins, precious metals, fine wine and certain other tangible items as collectibles. Since the Taxpayer Relief Act of 1997 cut the top rate on most long-term capital gains to 20%, collectibles have kept a separate, higher ceiling of 28%, as The Tax Adviser explains.

A few details matter:

• 28% is a ceiling. If your ordinary bracket is below 28%, you pay your bracket rate. In practice, taxpayers in the 32% bracket and above pay the full 28%.
• NIIT stacks on top. At the 28% rate, adding the 3.8% NIIT brings the federal total to 31.8%, compared with 23.8% on long-term stock gains.
• State tax adds more. Most states tax capital gains as ordinary income, at rates that can exceed 10%.
• Bullion counts. Gold and silver bullion are treated as collectibles for this rate, even though certain coins are allowed in IRAs.
• Luxury watches, handbags and cars. Whether a particular item falls under the collectibles definition, or is personal-use property taxed at the standard rates, is a question for your tax advisor. Gains on either are taxable; losses on personal-use items generally are not deductible.

Why borrowing avoids the tax bill

A loan is not a sale. When you pledge an asset as collateral, you keep ownership, nothing is realized, and no capital gains tax is due. The loan proceeds are not income. You pay interest and fees for the use of the money instead of paying tax for the right to spend your gain.

That is why borrowing against art has grown into a large market. Deloitte and ArtTactic estimate outstanding art-secured loans at $33.9 billion to $40.0 billion in 2025, up 11.8% from 2024. Collectors and their advisors use the same approach with watches, jewelry, cars and other appreciated assets.

A worked example: selling vs. borrowing against a $400,000 watch collection

A collector bought a group of watches over ten years for $150,000. They are now worth $400,000. She needs about $200,000 for a business opportunity and expects to have the cash back within 6 to 24 months. She is in the top federal bracket and subject to NIIT.

Option A: sell

• Gain: $400,000 − $150,000 = $250,000
• Federal collectibles tax at 28%: $70,000
• NIIT at 3.8%: $9,500
• Total federal tax: $79,500 (state tax not included)
• Cash after federal tax: $320,500, before any dealer spread or auction commission
• The watches are gone, along with any future increase in their value.

Option B: borrow

• Pledge the collection at an illustrative 50% loan-to-value: $200,000 in capital.
• No sale, so no capital gains tax.
• Cost: interest and fees for the time the loan is outstanding. This example assumes an all-in cost of 12% per year. That figure is for illustration only; actual pricing depends on the asset and the agreement.
• The watches are returned on repayment, and any appreciation is hers.

Cost comparison at 6, 12 and 24 months

The fair comparison is cost per dollar of cash raised. Selling raises $320,500 at a federal tax cost of $79,500, or about 24.8% of the cash raised, paid once. Borrowing raises $200,000 at a cost that grows with time.

In this example, borrowing costs less for any need shorter than about two years, before counting state tax and selling costs, which push the break-even further out. A dealer spread or 15% to 25% auction commission on the sale would widen the gap further.

How to estimate your own break-even

1. Calculate the tax you would owe on a sale: gain × (28% or your bracket, if lower) + 3.8% NIIT if it applies + state tax.
2. Add selling costs: commission, spread, shipping and insurance.
3. Divide that total by the net cash the sale would produce. This is the one-time cost of selling, as a percentage.
4. Divide the loan's annual all-in cost by 12 to get a monthly percentage.
5. Divide step 3 by step 4. The result is roughly the number of months you can borrow before the loan costs as much as selling.

The step-up in basis and "buy, borrow, die"

Under Internal Revenue Code §1014, assets passed to heirs generally receive a new cost basis equal to their market value at the owner's death. Unrealized gains held until death are not taxed as income. Heirs can then sell, repay any loan, and owe little or no capital gains tax on appreciation that built up during the owner's lifetime.

Wealth planners call this "buy, borrow, die": hold appreciating assets, borrow against them for cash, and let the basis reset at death. It is legal and widely used, but it carries real costs and risks. Interest compounds if loans are rolled over for years, estate tax may still apply, and a falling asset value can force a sale at a bad time. Short-term asset-backed loans are a tool for specific liquidity needs, not a substitute for an estate plan. Discuss any long-term strategy with your estate attorney and CPA.

Is the interest deductible?

Usually not. Interest on a loan used for personal purposes is generally not deductible under §163(h). If loan proceeds are used in a business or to buy investment property, some or all of the interest may be deductible under the business or investment interest rules. How you use the money and how you track it matters, so ask your CPA before you borrow.

When selling is the better choice

• You need the money permanently. If there is no repayment source, a loan only delays a sale and adds interest.
• The asset is likely to fall in value. Borrowing keeps you exposed to the asset's price. If you expect it to decline, selling now may be better.
• Your gain is small or you have a loss. Little or no tax is saved by not selling.
• Your bracket is low. If you would pay 15% or less on the gain, the tax savings shrink.
• You no longer want the asset. Paying to keep something you would rather sell rarely makes sense.
• You have offsetting losses. Capital losses from other investments can reduce the tax on a sale.

Year-end checklist before you sell a collectible

1. Confirm your cost basis, including purchase price and any buyer's premium you paid.
2. Check the holding period. Selling one day before the one-year mark can push the gain into ordinary income rates.
3. Estimate federal, NIIT and state tax on the sale.
4. Add selling costs and the time a sale will take.
5. Get a borrowing quote for the same amount and compare total cost over your realistic timeline.
6. Review the decision with your CPA before December 31 if you want the sale or the loan to fall in this tax year.

Compare borrowing to selling for your asset

LQD can give you a confidential liquidity offer, typically within hours and with no credit check, so you can compare it with a sale before you decide. Request a confidential review. See also our complete guide to luxury asset loans.

This article is general information, not tax, legal or financial advice. Tax treatment depends on your circumstances and current law. Consult a qualified tax professional before acting. LQD offers private, asset-backed capital; approval and terms are subject to underwriting.

Sources

• The Tax Adviser: Taxation of collectibles
• Deloitte Private and ArtTactic: Art and Finance Report, Section 5
• Tax Policy Center: Capital gains taxes and the fine art market
• IRS Publication 544 and IRC §§1(h), 163(h), 408(m), 1014, 1411

About LQD: LQD is a private capital network and consulting platform, not a bank or licensed lender. LQD does not originate loans, hold deposits or offer banking products.