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Wine and taxes

by Steffi Claiden

Where there is supply and demand in the right proportions, there are inevitably investment opportunities. Wine and port as well as whiskey now offer the connoisseur a way to make money off their passion for potables — if they know what to do.

The focal point for most American investors is Bordeaux futures, meaning the investor purchases the wine before it is produced and then delivered several years later. Returns have been lower since 2011, but an investor can still expect a 5 percent to 15 percent return.

Some positive arguments for wine investing are portfolio diversification with potential for higher capital growth and lower volatility and correlation compared to the stock market, as well as currency and inflation hedges. The down sides are the ongoing insurance and storage costs, possibility of spoilage, damage, theft or fraud. The wine market is also less transparent and liquid compared to the stock market.

Wine investing of all kinds tends to be more popular in Europe than the United States because of the favorable tax treatment. In the United Kingdom, forexample, wine is considered a “wasting asset” and if it is bought “in bond” (purchased from a reputable dealer and the buyer never takes physical possession) there are no capital gains taxes due upon sale. In the United States, a 28 percent collectibles tax is levied, which is higher than the top capital gains tax of 20 percent. Some Americans hold wine investments in Europe, but must take good tax advice to avoid running afoul of the IRS and local tax authorities.

Interested? A serious investor should be prepared to spend about $50,000 to get started. This allows enough diversification to enhance portfolio risk-adjusted returns, explains Mark Ricardo, founder and president of Trellis Fine Wine Investments. However, if individual bottles or cases or investing solo are not appealing, consider a wine fund or joining forces with family and friends.

“There is a ‘J’ curve to wine investing like venture capital,” says Ricardo. “You have to be prepared to buy and hold for five to 10 years. You can’t just buy and then go out the next year and sell at a profit. Also, no one can predict exactly what it will be worth down the road. This is something that should be done because you enjoy it, not purely to make money.”

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