There is no question that when people who purchase a luxury handbag do so, they know that in many cases that product will retain a significant portion of its purchase value. Additionally, many limited run models are known to increase in value over time well after the purchase date. For the owner, this can be convenient, fashionable way to lock in some value with the potential to grow in the future. However, when and if the luxury handbag is actually sold, the profit isn’t all for keeps. According to the federal tax rules and the IRS, the gain is considered taxable income.
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There’s a reason why luxury handbags sell so well in international airports and duty-free stores – there’s no sales tax. Given the price on the products, sales taxes can represent a fairly hefty charge. However, a luxury handbag, if bought and then resold later as an investment, can definitely be considered taxable income under federal tax law. The specific category of charge for the profit made in such a sale is known as a capital gains tax. The rate applied is lower than the typical income tax rate most people are familiar with, but it is a chargeable tax nonetheless.
As far as the IRS is concerned, the profit made on a handbag sale is investment income. Therefore, just like selling gold coins, real estate, or stocks in a company, capital gains tax rates apply, and the sale needs to be reported on one’s annual income taxes. State tax agencies aren’t far behind, expecting to see their share of capital gains on state tax returns as well.
Mathematically, the figure that matters is how much net profit the owner actually makes on a resale. That includes the net value after one removes the original purchase price and any charges, fees, tariffs or sales taxes applied to the original purchase. So if one bought a luxury handbag for $25,000 and paid another $5,000 in fees and sales tax, then the resale value has to be more than $30,000 before any amount of the proceeds would be considered taxable income. Assuming the resale price was then $40,000 a few years later, the difference of $10,000 would need to be declared as net profit, and a capital gains tax rate of 15 to 20 percent would apply ($1,500-2,000), depending on how long the bag was held. Or does it? This is where things get very tricky.
The capital gains tax laws also have a loophole when it comes to collectibles. If a luxury handbag falls in this category, the capital gains rate for federal taxes is a whopping 28% of any profit in a resale (or more if in a higher tax bracket). So what is a collectible defined as? According to the IRS, a collectible is generally held for more than a year and is an antique or work of art among other categories. Luxury handbags definitely resemble these characteristics when produced and held as a limited run for a number of years before resale. That said, it’s best to confer with a licensed tax preparer or attorney to be absolutely sure.
So in addition to sales taxes and fees, a luxury handbag owner needs to anticipate more taxes if the handbag is ever sold or bequeathed. Such is life where there is gain.