Tax Question

[jcc6252]

I have a question about determining taxable income from buying and selling cards. Here is a hypothetical scenario:

For 2014:

A) Beginning Inventory $30,000
B) Inventory Purchases $35,000
C) Ending Inventory $40,000

D) Inv. Sold (A+B-C) $25,000

E) Gross Sales $33,000
F) Expenses $ 3,000

Would I be responsible for $5,000 (E-D-F) in taxable income?
Or, would it be considered a loss for the year, since I finished the year with $10,000 more (C-A) in my inventory?

Thanks,
-Jim

[Sean1125]

Too late in the day for taxes. I'll leave it to the CPA's here.

[jcc6252]

As a business this shows as a loss. I am not 100% sure on a personal return.

Yes, Sean, thanks for pointing this out. I ask the question in regards to a personal return.

[Beastmode]

It's C-A+S+H. According to another thread, seems to be the way some dealers "solve" this tax equation.

[egbeachley]

Good grief. That's not a loss whether from a business or personal standpoint. You made $5,000 in income but you have $5,000 less cash because you purchased an additional $10,000 of inventory.

[Sean1125]

.

[bnorth]

I have a question about determining taxable income from buying and selling cards. Here is a hypothetical scenario:

For 2014:

A) Beginning Inventory $30,000
B) Inventory Purchases $35,000
C) Ending Inventory $40,000

D) Inv. Sold (A+B-C) $25,000

E) Gross Sales $33,000
F) Expenses $ 3,000

Would I be responsible for $5,000 (E-D-F) in taxable income?
Or, would it be considered a loss for the year, since I finished the year with $10,000 more (C-A) in my inventory?

Thanks,
-Jim

Talk to an accountant. The rules are different depending on where you live and there are different ways inventory is judged for tax use. Also if you travel and sell at shows you have to pay taxes based on that cities rates that also vary from place to place.

[Baseball Rarities]

Typically:

Revenue $33,000
- Cost of Goods Sold $25,000
= Gross Profit $8,000
- Operating Expenses $3,000
- Interest Expense $0
= Net Profit $5,000

Remember, you get what you pay for. Please contact a tax professional.

[begsu1013]

don't seek tax info from a cardboard forum.

too many unknown factors here to give you a solid answer, honestly.

[egbeachley]

The profit/loss calculation has no bearing on where you live or how inventory is treated or where the sales took place. Location only affects the tax rate and who you pay it to. The profit, $5K in this example, never changes. That's assuming the sales expenses were legitimate (i.e. didn't personally fly to Hawaii to hand-deliver the card). Inventory rules only typically affects rotating inventory stock of homogeneous product. We can assume he knows how much was paid for each card.

[jcc6252]

Thanks for the responses, particularly Eric's. Two simple explanations that seem to make sense are that my increase in inventory only serves to put a dent in my pocket, and "inventory rules only typically affects rotating inventory stock of homogeneous product".

Yes, I have done a thorough job of recording inventory costs and legitimate expenses, so I should be good to go.

[Maddog]

Based only on the info provided, Kevin's computation is correct and your taxable income will be $5,000 (assuming the expenses are deductible).
The real issue is whether you are a business or this is just an occasional sale. The rules are quite different between a business and hobby activity.
I agree, you should consult your regular accountant since there is more that needs to be considered than can be discussed here, such as why are we discussing 2014 figures and not 2015?

[TanksAndSpartans]

Calling purchases inventory doesn't feel right to me. Let's take a hypothetical example to exaggerate things. Imagine I added $10,000.05 worth of items to my collection and I sold a card for 5 cents to a kid on my street. I doubt I could claim a 10K loss on my taxes.

[egbeachley]

Calling purchases inventory doesn't feel right to me. Let's take a hypothetical example to exaggerate things. Imagine I added $10,000.05 worth of items to my collection and I sold a card for 5 cents to a kid on my street. Would I be able to claim a 10K loss on my taxes?

Yes. If you sold the $10K card by accident and kept the 5 cent card. When buying lots you have to properly allocate based on fair value.

[begsu1013]

i would also suggest talking w/ your accountant in terms of the items sold and whether they are "collectibles" or "investments". about a 9% difference in your tax rate there depending on how it's defined on your k1.

[TanksAndSpartans]

Yes. If you sold the $10K card by accident and kept the 5 cent card. When buying lots you have to properly allocate based on fair value. Right, I understand that part. I was trying to get at something different. A lot of us are collectors who occasionally sell a card. But it wouldn't seem like I could then take purchases minus sales and call it a loss because I bought more than I sold. Granted the OP seems to by buying with the intention to sell, but that's why I exaggerated the example.

[birdman42]

Here is a hypothetical scenario:

A) Beginning Inventory $30,000
B) Inventory Purchases $35,000
C) Ending Inventory $40,000

D) Inv. Sold (A+B-C) $25,000

E) Gross Sales $33,000
F) Expenses $ 3,000

Would I be responsible for $5,000 (E-D-F) in taxable income?
Or, would it be considered a loss for the year, since I finished the year with $10,000 more (C-A) in my inventory?

As a tax professional (Enrolled Agent), I can weigh in on this.

If you're conducting a business, whether on the side or as a full-time effort, the fact that you ended the year with more inventory than you began with is beside the point. What matters is how much you paid for the specific items you sold.

Deciding whether it's a business or a hobby depends on the overall facts of the individual case. If it's truly a business you can take the occasional loss, but if it's a hobby you can not take a loss in any year. And the rules about what you can count as expenses are tighter for a hobby. For example, you could always count shipping costs, but costs for travel to a show in Phoenix in February would be a tough sell to me if it's a hobby.

Also, when the line between "my collection" and "my inventory" starts to blur, then you're in peril of your business being determined to be a hobby.

To circle back to the OP's original question, as others have said there is a taxable gain of $5,000 in this scenario. If you're running it as a business then you'd do a Schedule C (you can't do the C-EZ, because you have cost of goods sold), and you'd owe self-employment tax (that's both halves of FICA) on the net income, figured on Schedule SE. If it's a hobby, then any income shows up on line 21 as Other Income, with no SE tax owed.

Bill

[ValKehl]

Bill, I agree with you with respect to Schedule C being appropriate if the $5,000 profit is from one's sports card business.

However, I disagree with your response if the profit is from one's hobby. It is my understanding from reading IRS Publication 17 (pages 108 and 118 in particular) that a profit from the sale of a collectible is considered by the IRS to be a capital gain. Capital gains are either long-term or short-term, and both are reported on Schedule D; and most likely, one would need to report the details of the collectible gain(s) on Form 8949, which is used to support Schedule D. And, if one's collectible gain is long-term, this necessitates completing the 28% Rate Gain Worksheet to arrive at the figure to put on Line 18 of Schedule D. And, finally, one will need to use the Schedule D Tax Worksheet to calculate the amount of tax on one's taxable income.

FYI, I do not claim to have income tax expertise. The reason I say this is earlier today I finished my federal income tax return, and in so doing, I researched the IRS pubs to determine how I should report the profit I made on a card I sold last year. If you believe my contention is incorrect, kindly provide me with IRS references for your contention.

Val

[tjb1952tjb]

Flat tax anyone??

[birdman42]

Bill, I agree with you with respect to Schedule C being appropriate if the $5,000 profit is from one's sports card business.

However, I disagree with your response if the profit is from one's hobby. It is my understanding from reading IRS Publication 17 (pages 108 and 118 in particular) that a profit from the sale of a collectible is considered by the IRS to be a capital gain. Capital gains are either long-term or short-term, and both are reported on Schedule D; and most likely, one would need to report the details of the collectible gain(s) on Form 8949, which is used to support Schedule D. And, if one's collectible gain is long-term, this necessitates completing the 28% Rate Gain Worksheet to arrive at the figure to put on Line 18 of Schedule D. And, finally, one will need to use the Schedule D Tax Worksheet to calculate the amount of tax on one's taxable income.

FYI, I do not claim to have income tax expertise. The reason I say this is earlier today I finished my federal income tax return, and in so doing, I researched the IRS pubs to determine how I should report the profit I made on a card I sold last year. If you believe my contention is incorrect, kindly provide me with IRS references for your contention.

Val

Val,

You're correct when it comes to selling off parts of your collection that you've held long-term. I knew there was something else I was going to add. That's what I get for trying to answer a substantive question after a 14-hour day...

[Stetson_1883]

Uhh, Jim I wouldn't worry about i especially with what multinational, billionaire corporations get away with. :o

[Vintageismygame]

To the OP:

Between what Bill and Val have said is the appropriate way to handle this. That being said, I still would advise you to contact your tax accountant and discuss this matter in finalization with them.

Matt (CPA)

[ValKehl]

Flat tax anyone??

Tim, I have little doubt that the "1%ers" would greatly favor of a flat tax. But a flat income tax, just like a sales tax and/or a value-added tax, adversely affects those folks who are at the lower end of the income scale the most.
Val