The long-term capital gains rate is the United States federal tax rate applied to profits from the sale of assets held for more than one year. For most asset classes — stocks, bonds, mutual funds, and the principal residence — long-term gains are taxed at 0, 15, or 20 percent depending on the seller's income. Gemstones, however, fall into the Internal Revenue Service's collectables category and are taxed at a maximum federal rate of 28 percent regardless of income, plus state taxes and the 3.8 percent net investment income tax where applicable. This higher rate has been in place since 1997 and materially affects the after-tax economics of gem investment.

The collectables classification

Internal Revenue Code section 408(m) defines collectables to include any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, and any other tangible personal property the IRS designates. Gemstones — whether loose stones, mounted jewellery, or rough material — fall squarely within this definition, as do gold and silver bullion held outside qualified retirement accounts. Section 1(h)(4) and (5) then sets the maximum long-term capital gains rate on collectables at 28 percent, compared with 20 percent for most other long-term gains.

Short-term gains on gemstones, defined as gains on stones held one year or less, are taxed at the seller's ordinary income tax rate, which can run as high as 37 percent at the federal level. The 28 percent collectables rate applies only to gains on stones held more than one year. Holding period therefore matters: a stone sold at gain after eleven months is taxed at ordinary rates; held one day longer, the same gain falls under the long-term collectables rate.

The state and surtax overlay

The 28 percent federal rate is the floor for federal liability on long-term gem gains; total tax can be higher. State income taxes apply on top of federal capital gains in most states, with California's 13.3 percent top marginal rate the highest. The 3.8 percent net investment income tax applies to high earners on capital gains, including collectables gains. A California resident in the top federal and state brackets selling a long-held investment-grade stone for a substantial gain therefore faces a combined rate approaching 45 percent, materially higher than the 23.8 percent federal-plus-NIIT rate on equivalent securities gains.

Why the 28 percent rate exists

The 28 percent collectables rate was set in the Taxpayer Relief Act of 1997 as part of a broader restructuring of capital gains rates. The rate was designed to maintain pre-1997 tax treatment of collectables while reducing rates on securities and real estate, on the policy view that collectables represent consumption rather than productive investment. The classification has been criticised as anachronistic by tax practitioners and collector advocates, particularly given the established secondary markets for art, fine wine, and gemstones, but no significant legislative reform has been enacted in the intervening decades.

Practical implications for buyers

The collectables rate has three practical consequences for gem buyers thinking about investment dynamics. First, after-tax returns on long-held investment-grade stones are materially lower than after-tax returns on equivalent appreciation in stocks or bonds. A 50 percent gain on a stone held five years yields a meaningfully smaller after-tax return than a 50 percent gain on a stock held the same period. Second, transaction timing matters: the 12-month threshold between short-term and long-term treatment is a hard line, and buyers contemplating a sale near the boundary should generally hold past the threshold to capture the lower rate. Third, basis tracking is critical: the IRS taxes the gain, defined as sale price minus cost basis, which for inherited stones is generally the fair market value at the date of death (the step-up rule) and for purchased stones is the original purchase price plus documented improvements.

Documentation of acquisition cost, certifications, and any setting or recutting expenses should be retained for the life of the holding. For stones inherited rather than purchased, an appraisal at the date of death establishes the stepped-up basis and can substantially reduce later capital gains liability. Without documentation, the IRS can assess basis at zero, treating the entire sale price as gain.

UK and other jurisdictional notes

The 28 percent collectables rate is a US-specific construct. UK collectors face Capital Gains Tax at standard rates — 18 percent for basic-rate taxpayers and 24 percent for higher-rate taxpayers as of the 2024 Autumn Budget — with the annual exempt amount applying to total gains across all assets. Some chattels (movable personal property) below £6,000 in sale price are entirely exempt under the chattels exemption. Investment-grade gems generally exceed this threshold and are therefore subject to standard CGT treatment without any equivalent of the US collectables surcharge. Buyers in other jurisdictions should consult local tax advisers, as the treatment varies widely.

In the trade

The 28 percent collectables rate is one of the reasons US buyers thinking of gemstones as an investment vehicle should model after-tax returns rather than headline appreciation. We recommend that any buyer purchasing for investment purposes retain full documentation, hold past the 12-month threshold before considering sale, and consult a tax adviser experienced with collectables before any significant disposition. The rate also affects the choice between holding gems personally and holding them through a trust or LLC; structuring decisions are best made with professional advice rather than from general guidance.

Further reading

• Internal Revenue Service — capital gains and collectables
• GIA Gems & Gemology — gem investment market reference
• HMRC — UK capital gains tax