Wine and whisky

In short

A friend of mine once bought a case of wine for his daughter's future wedding, and it sat in his basement for twelve years. If you are holding a few bottles of good wine or whisky, or thinking about buying some, the first thing to know is that the price on the label is not the whole story. Storage, insurance, and dealer fees all take a bite. Taxes can take another one when a bottle sells at a gain, because the IRS may treat wine and whisky as collectibles. The sale price you can really expect is often lower than the number you see in an auction headline. Read the rules for your own country, because they differ a good deal. Write down every cost before you decide anything.

The whole of it

What it is

I once watched an old man open a bottle he had saved for thirty years, and the table went quiet when he poured it. That bottle was a drink, but it was also a piece of property, and that second fact is what this guide is about. Fine wine and whisky are called alternative assets. That just means they sit outside the usual stocks and bonds that most retirement accounts hold. They pay no interest and no dividends. Whatever return a bottle brings comes only from selling it for more than it cost.

Some bottles gain value because they get scarce. Each bottle that gets drunk leaves fewer in the world. Others gain because a cask of whisky matures in the barrel and becomes a different product over the years. Many bottles never gain at all. A wine can turn to vinegar if it is stored badly, and a fashion can fade. A friend of mine learned this the slow way. A bottle is not a promise. It is a thing that someone else may or may not want to buy from you later.

How it works

If you have ever sold a used car, you already know the basic shape of this. You find a buyer, you agree on a price, and the paperwork changes hands. With wine and whisky the buyer is usually a dealer, an auction house, or a private collector. Each one wants a cut. An auction house often charges the seller a fee and the buyer a fee, and those fees are set by that auction house, so read its published terms before you consign a single bottle.

Storage matters more than most people expect. Wine wants steady cool temperatures and little light. Whisky in sealed bottles is more forgiving, but a cask is a different matter. A cask is often held in a bonded warehouse, which is a storage site approved by the tax authorities. The owner pays rent for the space and often a fee for insurance. A friend who looked into cask whisky told me the storage bill was the part nobody mentioned in the brochure. That rent runs every year, whether the whisky gains or not.

Then comes tax. In the United States, the IRS treats some collectibles differently from stocks when they are sold at a profit. IRS Publication 544 covers sales and other dispositions of assets, and it is the place to read how collectibles are handled. The long term rate on collectibles can be higher than the rate on stocks. The rate that applies is set by law, so check the current figure at the current figure, which the official source publishes each year on the IRS site before you count on any after tax profit.

The numbers, and where to find yours

You have probably seen a headline about a bottle selling for a huge price. That is one bottle, on one day, to one buyer. Your own bottles have their own numbers, and you can find them. Start with what you paid, including any shipping and fees. That figure is your cost basis, which is the starting point the IRS uses to work out your gain or loss.

Next, find what the bottle might sell for. Auction houses publish past results on their websites, and those results show real sale prices. Look at bottles of the same wine, the same year, and the same condition. Condition matters a lot. A torn label or a low fill level can pull the price down.

Then add up the yearly costs. Ask the warehouse for its storage rate and your insurer for its premium. For the tax side, the collectibles rate lives at the current figure, which the official source publishes each year, and the holding period that makes a gain long term lives at the current figure, which the official source publishes each year. Those two figures change only when the law changes, so look them up fresh each time.

A worked example

Let me tell you about a made up woman named Ruth Ellison, a retired schoolteacher in a story built to show the arithmetic. In this story she bought a case of twelve bottles of Bordeaux for $4,800. That is $400 a bottle. She paid $150 to have the case shipped to a climate controlled warehouse. She then paid $120 a year for storage and $60 a year for insurance, and she held the case for eight years.

Her yearly cost was $120 plus $60, which is $180. Over eight years that is 8 times $180, or $1,440. Add the $150 shipping, and her total carrying cost is $1,440 plus $150, which is $1,590. Her full outlay, counting the purchase, is $4,800 plus $1,590, which is $6,390.

After eight years the case sold at auction for $8,400. The auction house charged the seller a fee of 10 percent, which is a rate Ruth saw in that house's published terms. Ten percent of $8,400 is $840. So she received $8,400 minus $840, which is $7,560.

Her gain, counting every cost, is $7,560 minus $6,390, which is $1,170. That is a gain of about 18 percent on her full outlay, since $1,170 divided by $6,390 is a little over 0.18. Over eight years, that is a small yearly return. And this was before tax.

Now the tax. The IRS may treat her gain as a collectibles gain. Say the rate set by law were the figure shown at the current figure, which the official source publishes each year. She would apply that rate to her taxable gain and subtract the result from the $1,170. Whatever the rate, the tax comes out of a gain that was already modest. Ruth told me she enjoyed the whole thing. But she also told me she would have been better off knowing the costs on day one.

Where it goes wrong

I have noticed that the stories people tell about wine and whisky are the happy ones. The sad ones rarely get told at dinner. So let me tell a few quietly.

Fakes are the first trouble. Counterfeit bottles of rare wine and whisky have been sold to careful buyers. A buyer should deal with a seller who can show where each bottle came from, and the buyer has to be able to prove it later to a new buyer. Missing paperwork can lower the price a great deal.

Storage failures are the second. A cork can dry out, and a warehouse can fail. The owner bears that loss unless insurance covers it, and a policy may not cover slow damage like heat over many summers. Read the policy for what it leaves out.

Selling costs are the third. A bottle you could not sell for what you hoped is still sitting there, costing you rent. These are not liquid assets. A stock sells in seconds. A rare bottle can take months to sell, and the dealer will want a margin.

Cask whisky has its own risks. Cask whisky is sold as a claim on a real cask, so it matters whether the cask truly exists and where it is stored. The buyer should confirm ownership in writing. Before paying a seller, a buyer can search the website of the financial regulator in the seller's country to see whether it has published any notice about that firm.

Last, there is the plain matter of taste. Prices follow fashion, and fashion changes. A region that is loved this decade may be forgotten in the next.

Questions to answer before you leave this page

Have you written down what each bottle or cask cost you, counting shipping and fees? Do you know the yearly price of storage and insurance, and have you multiplied it by the years you plan to hold? Can you find recent auction results for the same wine or whisky in the same condition, and not only the famous headline sales? Do you know how the IRS treats collectibles when they sell at a gain, and where the rate at the current figure, which the official source publishes each year is published, so it need not be guessed? Could you prove where each bottle came from if a buyer asked? Would you be content if the whole thing earned nothing, and you simply had good bottles to enjoy with people you love?