With any investment, investors ought to be mindful of taxes.
Without setting aside a percentage of earnings, investors may not be prepared come tax season.
With wine investments, taxes certainly apply. Depending on where you live, your tax liability changes state by state.
In this article, we take a deep dive into wine investing taxes.
How Is Wine Classified?
The way wine investments are taxed depends on how they are classified.
This classification can vary depending on where you live.
In the United States, wine as an asset is classified as a collectible. This means that wine investments will be taxed as a collectible in the US.
- In the US, collectibles are taxed at a rate of 28% if held for greater than one year (long term investment).
- If the investment is sold prior to one year (short term investment), then it is taxed as ordinary income.
Depending on your adjusted gross income, you could actually pay less in capital gains taxes with a short term investment.
Wine Investment Taxes In The UK
On the other hand, wine investments in the UK are sometimes exempt from taxes as it can be classified as a “wasting asset” by the HMRC (His Majesty’s Revenue and Customs).
A wasting asset is one that has a lifespan of less than 50 years from the time that it was purchased.
Thus, investors in the UK may be exempt from capital gains tax with some wine investments.
However, keep in mind that some investment grade wine does have a lifespan greater than 50 years.
In that case, the investment would be taxed at the normal capital gains rate of 18% in the UK.
In many places in the world, wine has a similar classification as the UK.
For investors in countries such as Singapore, Hong Kong, Germany, France, and Austria, wine investments may be a tax free investment option.
Before investing in wine, be sure to understand how it is classified where you live.
What Is The Cost Basis?
Once you determine the rate by which your investment will be taxed, you next need to understand your cost basis.
The taxes owed on a wine investment come from the profit, not the entire sale.
The cost basis is the amount that is non-taxable. It is typically what you paid for the item plus any broker or transaction fees.
In some instances, like if you inherited the wine, then the basis is actually the fair market value of the item at the time of inheritance.
Some collectibles may also warrant an appraisal if the fair market value of the item is not readily known.
Wine Investing Tax Example
For example, suppose you purchase a bottle of vintage wine for $380 and you live in the US.
Further suppose that you also paid $20 in transaction fees.
The cost basis in this example would be $400 (purchase price plus transaction fees).
After 3 years, you decide to sell the bottle and do so with a sale price of $500.
In this instance, your profits were $100.
Because you live in the US and you held the investment for greater than a year, the investment will be taxed at a rate of 28%.
So, in this case, you would owe $28 in capital gains taxes. (Sale price minus the cost basis to determine the profit. Then the profit multiplied by the tax rate.)
What Are VATs?
All wine investments are subject to a Value Added Tax as well as import charges.
However, most investors can bypass this tax by storing their wine through a bonded warehouse.
Value Added Tax is a tax designed to impose a tax at every part of production all the way to the point of sale. When stored in a bonded warehouse, these taxes are not owed until the wine is removed from the bond.
What About Income Tax?
In some instances, wine investments may be subject to income tax.
However, this typically only applies to those that trade wines with high frequency.
For the average wine investor, this tax is not applicable.
Final Thoughts On Wine Investment Taxes
Wine investments can certainly be lucrative.
With annual returns that rival the stock market, it’s easy to understand why investors are recently taking notice of wine. Not to mention the fact that wine as an asset class has low correlation to the stock market and acts as a natural hedge against inflation.
While wine can be a solid investment option, it also has unique tax implications.
However, these tax implications vary pretty substantially depending on your location.
In the US, wine is treated as a collectible, and is therefore taxed as a collectible. But in many parts of the world, wine is viewed as a wasting asset and can actually be exempt from capital gains tax.
Before you invest in wine, be sure to understand how wine is classified where you live. And talk with your accountant to understand its implications for your personal situation.
If you want to learn more about investing in wine, be sure to check out our complete wine investing guide here!