Artworks, classic cars, fine wine, rare coins, and other collectibles have long captured the imagination of affluent investors. Beyond their aesthetic and cultural appeal, these tangible assets are oftentimes treated as an alternative investment class, as a place to park wealth outside of stocks and bonds, far away from the volatility that those assets entail.
Collectibles can offer diversification, since their values don’t move in lockstep with public markets, and they provide a sense of legacy or personal fulfillment that a stock certificate cannot. Owning a Monet painting or a vintage Ferrari introduces a hands-on, tangible dimension to one’s wealth. However, investing in art and collectibles presents unique considerations that distinguish it from mainstream assets.
The ultra-high-net-worth population globally holds an estimated $1.5 trillion of their wealth in art.1 The allure is understandable: a well-chosen painting or a rare antique can become a conversation piece today and (with luck and timing) a valuable legacy for the next generation. But while the success stories of auction block triumphs grab headlines, we must weigh the potential rewards against the significant risks and costs involved.
How Have Collectibles Fared?
How do their returns stack up against traditional assets like equities, fixed income, or real estate? Over certain periods, segments of the art market have delivered impressive appreciation, even outperforming stocks. For instance, one index of contemporary art prices showed a 13.8% annual return from 1995 to 2021, significantly higher than the S&P 500’s ~7.9% inflation-adjusted return (~10.5% nominal with dividends) in that same period.2 , revealing a boom in high-end art values over those decades, fueled by wealth creation and a surge of new collectors. Indeed, during some high-inflation eras, top-tier art prices have climbed sharply (benefiting from art’s appeal as a store of value).
That said, broader historical analyses suggest stocks generally outperform collectibles over the long run. While exceptional pieces of art have made fortunes for their owners, the average art investment tends to appreciate at a more modest rate, roughly on par with or below other asset classes. Academic and industry studies often peg art’s long-term average returns in the mid-single digits (around 4–6% annually).3
How Have Collectibles Fared?
Annual Returns: Collectibles vs Traditional Assets
This is similar to the historical range for U.S. real estate (which has typically returned ~4–8% per year on average)4, 5, and is a bit higher than bonds (~4–5% per year)1, 7, but still notably lower than stocks, which have delivered ~7% per year after inflation over the past decades.4
In other words, while collectibles can sometimes shine in specific periods, a broad basket of stocks has typically compounded wealth faster over the long term.1
There’s also plenty of variability within the collectibles market. The art world, for example, is not one monolithic market but many sub-markets: Old Masters, Impressionists, Contemporary, regional art, etc. In recent decades, Contemporary art has led the pack with the highest returns, caia.org,9 whereas other categories might lag behind. Likewise, certain collectible niches, such as rare whiskey, classic cars, and luxury watches, have had periods of spectacular price increases.
This dispersion means an investor’s experience can vary widely: a trophy asset bought at the right time can hugely outperform indices, while an ill-timed or mediocre-quality purchase might appreciate slowly (or not at all). In sum, historical performance for collectibles is mixed. There have been hot streaks where top-tier art or collectibles outgained stocks, but across broad averages and longer horizons, their returns tend to be in the modest single digits, with equities still the growth engine in most portfolios.1
The Risks of Collectibles
Taken together, art and collectibles present a risk-return profile that is quite atypical. They can deliver equity-like (or even superior) returns in the best cases, but with volatility and downside risks that are difficult to quantify and mitigate. First of all, they’re highly illiquid. If you’re in sudden need of cash, you could be forced to sell at a lower price. Secondly, they could quickly lose their value. Trends come and go, and even something as banal as an artist ruining their own reputation could see your piece tumble in value overnight. They don’t earn an income like a bond or stock, so any loss in value isn’t even made up for by the income earned over the period you owned it. Finally, any physical good is ultimately at risk of being physically destroyed. Fire, flood, theft, you name it.
Collectibles as Investments
PROS
- Potential for high returns
- Portfolio diversification
- Hedge against inflation
- Personal enjoyment value
- Tangible asset ownership
- Potential tax advantages at death
- Low correlation with stocks/bonds
CONS
- High illiquidity risk
- Subjective valuation challenges
- No income generation
- High carrying costs
- Authentication & fraud risk
- Physical damage/theft risk
- Market volatility
- High transaction costs
Tax Treatment and Estate Planning Considerations
If you sell a collectible at a profit, be prepared for a higher tax bite than you’d face with stocks or real estate. In the U.S., long-term capital gains on collectibles (held over one year) are taxed at a maximum 28% rate.17 This is considerably higher than the 15% or 20% top rates that apply to most other investments like equities. (Short-term gains on collectibles, for items held one year or less, are taxed as ordinary income at your full income tax rate, which could be even higher.) The rationale is that Congress set a special 28% cap for collectibles gains, presumably recognizing the speculative nature of these assets.14
For high earners, you may also owe the 3.8% net investment income tax on top, making the effective federal tax on a big art sale over 30%.14 There are no preferential tax breaks for collectibles akin to the 0% capital gains bracket that some stock investors enjoy, so almost everyone pays some tax on collectible gains. This higher tax drag means you keep less of your profit, which can significantly affect net returns.
Adding to the above, collectibles generally cannot be held in tax-advantaged accounts like IRAs or 401(k)s. The IRS rules explicitly prohibit IRAs from investing in collectibles (with very limited exceptions for certain coins and bullion) – if an IRA does purchase a collectible, it’s considered a distribution of the amount invested, triggering taxes and penalties. This means you usually can’t defer or avoid taxes on collectibles by putting them under a retirement plan wrapper. They nearly always will be held in taxable portfolios, where any gain will face that 28% rate when realized. Furthermore, the old strategy of using like-kind exchanges (Section 1031 exchanges) to defer capital gains by swapping one piece of art for another is no longer available.
Prior to 2018, investors could trade one collectible for a similar one and defer taxes on gains, but the tax law changed – since 2018, 1031 exchanges are only allowed for real estate, not for personal property like art.15 So, selling a collectible usually means a taxable event; the only way to avoid the tax might be through charitable giving (donating the item to a museum for a tax deduction) or by planning to hold it until death (when some tax benefits may arise, as discussed next).
Estate Planning and Heirlooms
Collectibles often carry emotional value and the hope of being passed down through generations. But from an estate planning perspective, they require special handling. At death, collectibles are included in your estate at fair market value, just like other assets, which can potentially trigger estate tax if your total estate value exceeds the exemption. The good news is that, like other assets, collectibles typically receive a step-up in cost basis at death: the heir’s basis becomes the date-of-death value. 16
This means any appreciation during your lifetime may escape capital gains tax if the item is sold by your heirs, since the gain is “reset.” For example, if you bought a painting for $100k that’s worth $1 million at your death, your heirs wouldn’t owe any capital gains tax if they sold it right away (before it has a chance to appreciate further). If it does appreciate further, then they’d be taxed on that appreciation, not the appreciation that occurred during your lifetime.
However, it’s not all easy when settling estates with collectibles. Accurate appraisal is critical. The IRS requires a qualified appraisal for any art or collectible item valued over $3,000 in an estate (which is virtually all significant pieces).17 Estates must attach expert appraisals and details to the estate tax return (Form 706) to substantiate the value. Under-valuing an asset to reduce estate tax is illegal, and the IRS has an Art Advisory Panel that reviews high-value art appraisals for reasonableness. Therefore, it is advisable to hire professional appraisers and possibly art consultants during the estate settlement process to ensure accuracy. It’s also wise to document provenance and purchase details during life – this makes the appraisal process smoother and helps your executors and heirs understand what you have.
Finally, dividing collectibles among heirs can be tricky. You can’t exactly cut a Ferrari in half. Clear estate planning documents should specify who gets what or whether items should be sold, to prevent family disputes. Some collectors choose to gift or donate collectibles during their lifetime (taking advantage of the currently high gift-tax exemption) to simplify their estate and ensure items go where they want. Others set up trusts or instruct executors to sell and split the proceeds to be fair.
Aligning Collectibles with Your Broader Strategy
Art and collectibles can indeed play a role in one’s financial universe, providing enjoyment, a form of diversification, and sometimes impressive returns. But as we’ve detailed, they come with strings attached: illiquidity, complex risk factors, potentially higher taxes, and estate complications. For most investors, these assets should likely remain accent pieces in the financial picture, complementing a well-structured core portfolio rather than replacing it. A portfolio anchored by low-cost, tax-efficient, and diversified investments will generally serve your long-term goals best, with collectibles acting as a satellite holding for those who have a passion (and the financial capacity) for them.
If you’re a business owner or high-net-worth individual holding collectibles, it’s wise to periodically review how these assets fit into your overall retirement and estate plan. Are you over-exposed to illiquid assets? Have you planned for the tax and transfer of your collection? Do you have a strategy for if and when to monetize any of them? These are important questions to address well before any life transition, and we’d be happy to help you answer them. Just click the button below.
Appendix
- Erskine & Erskine — $1.5 trillion in art: https://erskineanderskine.com
- Investopedia — Contemporary art vs. S&P 500 (1995–2021): https://www.investopedia.com
- European Business Magazine — Long-term art returns (4–6%): https://europeanbusinessmagazine.com
- NerdWallet — Average stock market return: https://www.nerdwallet.com/article/investing/average-stock-market-return
- CBRE — Case for U.S. Core Real Estate (2023): https://www.cbreim.com/-/media/project/cbre/bussectors/cbreim/insights/articles/2023-media-folder/the-case-for-us-core-real-estate/finalinsights-whitepaper–why-core-now-april-2023.pdf
- SparkRental — ROI on real estate: https://sparkrental.com/roi-on-real-estate/
- LibreTexts — Bond return history: https://biz.libretexts.org/Bookshelves/Finance/Principles_of_Finance_(OpenStax)/12:
_Historical_Performance_of_US_Markets/12.04:_Historical_Picture_of_Returns_to_Bonds - Invesco — Private real estate income: https://www.invesco.com/us/en/insights/private-real-estate-income-returns.html
- CAIA — Contemporary art returns: https://caia.org
- Really Good Whisky — Whisky price trends: https://reallygoodwhisky.com/blogs/the-really-good-whisky-blog/tracking-whisky-price-trends-in-collector-markets?srsltid=AfmBOoqYHHn9feW5UQMnanKBpBdgyuXvAYR2Fib32BDFSDmh0U8DFnkK
- Economic Times — Luxury watches vs. other assets: https://economictimes.indiatimes.com/wealth/invest/invest-in-time-for-high-returns-luxury-watches-have-outperformed-vintage-cars-art-diamonds-in-the-past-10-years/articleshow/109490818.cms
- Vin-X — Knight Frank Wealth Report (2023): https://www.vin-x.com/blog/investment/knight-frank-wealth-report-reveals-luxury-investment-inflation-busters-in-2023
- IRS — Collectibles tax rate (28%): https://www.irs.gov
- Kiplinger — Collectibles vs. investment taxes: https://www.kiplinger.com
- Wikipedia — Section 1031 exchanges (post-2018): https://en.wikipedia.org
- Commerce Trust — Collectibles in estate planning: https://www.commercetrustcompany.com
- IRS — Estate tax and appraisal rules: https://www.irs.gov
