Cost basis - Warning tax related topic
 

This has probably been discussed here previously, but I did search and couldn't find. I'm wondering how people determine the cost basis of a card (or any item) bought in a lot. If I buy a collection of 10,000 cards for $1000 dollars, then sell one card for $500 and keep the rest, is the cost basis of that card 10 cents?

Similarly, what is an acceptable way to determine cost basis for cards which you have no buying records of (most of my collection)? Surely, many here have crossed this bridge.

PS...Sorry for bringing the dreaded tax topic up, but there's a lot of people out there who will be trying to figure this out for the first time this year. If not interested, please scroll on.

The simple answer is to allocate the cost based on relative values of the items acquired.

Naturally, there’s potentially a lot of room for interpretation there.

Some people like to look at various price databases, potentially including SMR, cardtarget, or others that are out there to attempt to assign those relative values. My experience is that almost every item has a potential range of values, and you could spent an entire career trying to get the math right. My approach is to spend a little time on it, get it close enough that it seems reasonable, and then move on.

Based on your example, it’s not uncommon for one (or two or three) item(s) to be a lot more valuable than the rest. Certainly it’s possible that $500 of your initial cost should be allocated to the item you sold, so you have no gain on that sale. Naturally, if you go selling 3 or 4 of them for $500 apiece, then you’re going to have a gain in there somewhere!

I believe the least objectionable method from the IRS point of view would be to assess the relative value to each card in the lot. So, for instance, if you paid $10,000 for a box that had 999 1987 Topps commons and a PSA 2 1933 Goudey Babe Ruth, the cost basis for the Babe Ruth would be $9999 and the remaining 999 commons would have a combined cost basis of $1. If you try to claim the Babe Ruth cost basis is $10 in that scenario, prepare for some nice penalties and interest at the conclusion of your audit.

Generally, it is your job to prove to the IRS auditor (or ultimately the tax court) that you reasonably allocated the cost basis of multiple cards in a lot. If your method sounds the least bit sketchy or skewed in your favor, it is unlikely to fly with the IRS. In fact, my limited experience in audits is that even if you do act reasonably and fairly in preparing your taxes, you have the additional hurdle of having to educate a skeptical auditor about a hobby or business that does not understand it as well as you do (which actually hurts, not helps you in most cases).

Scott, I would think the IRS would be delighted if the person sold the Ruth and declared a cost basis of $10 on his tax return, thereby paying a significant amount of tax on his profit.

Makes sense guys...Thank you for the advice. It does raise the next question. How can you prove what else came in the lot?

And can you use reasonable value (average of recent sales) as a cost basis cards you don't have receipts for? Do you have translate those values to market value in the year you bought the card?

PS...What a nightmare for the casual seller.

In terms of proving what came in the lot, you probably have a receipt from the auction or purchase. If you were extra paranoid about the details not being spelled out, you could always sit down and document it when you acquired the lot.

In theory, you should be using relative current market values to allocate the purchase price between the items acquired.

Is it a nightmare for a casual seller? I'm guessing that a casual seller doesn't sell a lot, or at least not in high dollar amounts. And if I had to guess, they probably don't worry about attempting to report it on their taxes. Not that I would ever encourage such scofflaw behavior!

You are correct. I had it backwards. I shouldn't write responses 3 minutes after waking up. Better example. You sell the 999 1987 commons as a lot for $2 and claim a cost basis of $9990, then bundle that tax loss with other card sales with net gains to reduce income while holding the Ruth in your PC with the remaining cost basis of $10 (until you die and your heirs get the stepped-up basis). This may not end well if you are flagged for the audit.

I am going to stop typing before I give other stupid examples before the caffeine kicks in.

When I was selling a lot on ebay, most of my stuff was inexpensive. And even my better items had cost me very little.

What we did was report it as a hobby business, and simply made our cost 0 paying tax on the full gross.
That was actually close enough to reality that the time spent on documenting the cost and profit for everything would have "cost" more than we paid.
And hobby businesses as far as I know can't claim losses.

Did I overpay on taxes? Yes, I sure did. Did I save hours of paperwork? Yes.

For items purchased at an auction house or ebay, yes there are receipts. But shows? Responding to ads in the paper? No receipts.

I don't follow the "relative current market values" comment. If I bought a Pete Rose card at a show 15 years ago and don't remember what I paid...what is the cost basis? Not talking about a lot here...individual cards.

I think there are plenty of casual sellers that sell over $600 in a year. That's not difficult to do, especially these days.

I have a problem with that just on principle. My paycheck is being squeezed enough.

Allow me to update my comment about "current market value". I was referring to current market value at the date of acquisition, not as of today's date. If I purchased 100 cards in a large lot 15 years ago, then I would use the relative market values at the date of acquisition to allocate the cost between those 100 cards.

If you can't remember what you paid for a card from 15 years ago, then it sounds like your basis is probably zero. I would be tempted to dig deep into my memory to come up with a ballpark, although doing so could be dangerous.

In terms of getting over $600 per year in sales, you're right that the new rules require reporting once you hit that level. However, I wouldn't be surprised if those rules get modified. The reporting burden seems like it could be significant, and I expect that there will be an outcry to raise that limit.

I have a set of baseball cards from 1962 ( 62 Topps) which was given to me as a birthday present in 1962. If I sell now , is my basis $ 0 ??? I never paid anything for them and they probably cost less than $20 back then.

Gifts use carryover basis.

So whoever gave them to you probably had purchased them once upon a time. Their basis then transfers to you when they give you the gift.

Therefore, you're probably right that the basis is probably very low, because it's hard to imagine that the person who gave them to you spent very much on the items to begin with.

I can almost hear BobC approaching like a big T Rex crashing through the jungle :)

His fingers just got out of the gym, so they should be ready to begin a significant post.:eek::D

I know. Has anyone seen BobC lately?
I use my landed-cost basis for my cost and my net proceeds for my sale. It's not always a positive :(
And if I don't know the cost then 0 cost basis...doesn't happen often.
.

You know your cost basis and can prove it? Don't see how that's possible unless you've only bought from auction houses.

Really? I can't keep track of my buys...where, when and how much? There is this thing called Ebay.... and an excel spreadsheet. Google them. How hard is it to write down all of my BST purchases?

I have tracked, very diligently, my buys and sales over the years. I know my landed cost basis, where and when, on every card in my collection.
.

Writing down is proof? You were doing this in the 80s and 90s after every trip to the card show? Hats off to you if you were.

Coming out of the gate swinging. If you do it consistently, the IRS will accept it. I have a gmail account, and still have 20 years of emails; so that means every board purchase, ebay purchase, COMC purchase, PayPal transaction, etc all have a paper trail.

Ludicrous. You can easily find specific transactions?

You've never been to a card show?

I rarely buy anything at card shows. But you're boring me, so I'm going to stop responding and put you on my block/ignore list.

+1. Seems we have an antagonist amongst us.
.

What the? Wow...That's over sensitivity at it's worst.

How is it antagonistic to ask if hand written notes and an inbox with two decades worth of emails are acceptable forms of record keeping to the IRS? This is uncharted waters for many people and instead of helping, you guys respond like you're guarding a state secret.

Very odd.

Contemporary documentation is usually fine, even if it’s self-produced, as long as it’s not ludicrous. It’s nice to have a receipt if you can get one, or some other verifiable documentation.

Here’s the thing - unless your basis is really high, it’s just not going to matter enough for the IRS to fight you on it. You say your basis is $20? There’s no juice to the squeeze for them to argue that it’s less. Even if they are right, they’re not going to pick up much more than $5 off you. Not unless you’re selling 50,000 items at $20 basis.

And if your cost basis is really high, then you hopefully have been keeping some documentation in hand.

There’s one more wrinkle here- what happens when you die? Your assets enter your estate, and your heirs step up the basis to market value at your death. This way, even if they don’t know what your basis was, they get a new basis when they inherit from you.

No state secrets here. But as with many things in tax law, it’s often not as black and white as we might hope.

What value do you place on your time?

For example, I bought a railroad china plate for 25 cents at a thrift store. It sold for over $600...(yes, really ) The time I would have had to spend to prove and back out that 25 cents from the profit would be way more than the few cents of tax saved.
Nearly everything I sold came from places that didn't provide a detailed reciept, or any reciept at all, like yard sales.

the time I would have spent doing the paperwork backing out what was often a couple dollars, or much less for stuff like postcards bought in a lot where each was maybe 5-10 cents was far better spent looking for more stuff, or just having fun.

Because who doesn't love to nerd out on tax stuff...I will observe that modern tax forms force you to round to the nearest dollar. So 25 cents is zero dollars. Even if you wanted to waste your time proving your 25 cent basis, it's as good as zero when it comes to calculating your gain.

👍

Bump for BobC to find.

I have had this discussion with my accountant when I was trying to clarify if my bookkeeping was correct. I purchased a lot of a few thousand cards for $1000. I select many of the good cards out of the lot and sell them via ebay paying seller fees and shipping fees. The proceeds from each of these transactions I use to buy down the purchase price of the lot until I have recouped all $1000 I had spent (I'm literally determining cost basis of whatever I want but in this case it was the total value received). Once the lot was payed for then the remainder of my items I owned at a $0 cost basis and then taxes were paid on the proceeds from those cards as those sales were all profit. He said I can determine my cost basis any way I want as long as it's consistent and that I am keeping documentation.

“Any reasonable allocation method” is the precise terminology used by our friends at the service.

Naturally, reasonableness is in the eye of the beholder. And as an added bonus, it’s very facts dependent.

I’m not saying that your approach is wrong in this case. But there are certainly many cases where the IRS could disagree with your approach, particularly if the items left in your collection are as valuable or more valuable than the ones that you’ve sold.

As I mentioned earlier, if we’re talking about small potatoes, then it’s hard to imagine anyone gets excited, even if you’re using an allocation methodology of questionable reasonableness.

Yep. Obviously situations could easily come up where you're selling something that you picked up at a show in 1991 during the junk wax boom.

Being mocked for suggesting that it may not be easy to know every purchase price in your collection is absurd.

Didn't really need me on this one. Nicolo/raulus and Scott/Smarti5051 did a pretty good job saying mostly what I would. Try to remember what you can and/or have records and receipts for, and for everything else, estimate as best you can. Try to be reasonable and consistent in how you estimate and value things. Also, start writing stuff down if you hadn't before, especially in regard to things you're now estimating and/or allocating.

Maybe the biggest thing to make certain of when filing your federal income tax return is that everything is complete and properly filled out with no obvious omissions or mathematical errors that would otherwise cause your return to be kicked out by the IRS's system, and therefore possibly subject it to additional, actual human scrutiny. If you normally prepare and file your federal tax returns yourself, you may want to at least have someone with tax knowledge and experience look over and proofread the first tax return you start reporting these sales on, just to be safe and make sure you're not blatantly missing or doing something wrong. And unless you're a dealer filing and reporting your card activity as a business, you'll most likely be filing and reporting your card activity as a collector/hobbyist, in which case you don't want to show any losses for items you sold. If you are into cards as a hobby, you have to report and pay tax on any gains you may have had from your sales, but for any sales losses they aren't deductible, and you just end up reporting them as $0 gain/income on your return.

If you want more tax related info, go into the Search link, and then go into Advanced Searches. Once there, enter my username, BobC, and then hit the Search button. It will take you to all the threads I've ever posted in. Look for threads that mention or involve tax issues/questions (including threads about "vaults"), and just click on those thread links and look in them for my posts. I'll forewarn you to block out some time before you go looking, and maybe grab yourself a cup of coffee or a cold one before you sit down to begin. You'll find a lot of tax questions, issues, and topics related to the hobby are gone into in some detail. If you come up with any further tax related issues or questions, just ask. Good luck.

One of these days maybe I should go back through all the tax related threads I've ever posted in and put all the links to those in one new thread. That way, instead of always having to type the same or similar tax related answers and comments out in each new thread someone else starts, I can just post a link to the thread containing links to all my other tax related posts, and just say, "Read this.".

Welcome to the tax nerd party, BobC! Everyone seems to have been anxiously awaiting your arrival, so we’re excited you made it.

Yes...First, thank you to all who responded constructively. This has been very helpful I'm sure to many people.

I want to be sure I understand the section above because I was thinking I could net sales out and as long as the result was not a loss, I was good. But it sounds like you're saying this:

Example using small numbers for simplicity...If I sell 10 items and seven of them sell for $1000 each (plus $7000) and the other 3 I lose $1000 each (-$3000), I pay taxes on $7000 and not the net result $4000. Correct?

All depends on whether you are:

1) a dealer
2) an investor, or
3) a personal collector.

I realize that term #2 carries a lot of baggage around here, so people are loathe to suggest that they are an investor. But you might find that the tax outcomes are a lot better as an investor! Just don’t tell anyone on this board about your tax filing position.

This article might help a bit as well, in terms of understanding some of the differences:

https://frblaw.com/2022/01/04/tax-co...s-card-market/

Thank you. I will definitely read that article. But if I fall into the "personal collector" category is the answer in my example $7000 or $4000?

Based on the new law that is commonly known as TCJA, deductions from hobbies are no longer allowed. So you have all the income, and none of the losses or deductions.

I’m guessing that we’ll have a lot more closet investors around here…at least for tax purposes.

Thank you and that certainly stinks.

I'd guess that as well. Either that or Biden will have successfully turned us all into businessmen.

Wonder what the criteria to meet is for being an investor? Holding for a certain period? I'll check the article.

Thanks again

As outlined in the article, there’s not a distinct dividing line. It’s all facts and circumstances. In some ways, it could be as much of a question as how you view and approach it. Do you self identify as an investor? How often do you buy and sell? Do you make money at least sometimes when you do sell?

I would guess that anyone who sells even every once in a while, and makes a little money doing it on some sales is going to be fine claiming to be an investor.

Of course, all of the people running around here proclaiming that they will never ever sell no matter the price might have a harder time. But if they actually never sell, then they wouldn’t care anyway, because they’ll never have a gain or a loss, so there’s no tax consequences to them, at least under current tax law.

Now if the government gets around to implementing some of the proposals on taxing appreciated property, especially if they lower the thresholds low enough, then that would be a different scenario. But Bernie and his friends are likely to have a hard time getting that through, at least at thresholds that are low enough to effect most collectors.

LOL

You're doing a good job. I take it you've done/do taxes?

I am a CPA, so I get around.

Am as well. Been around the block a few times myself, that is for sure. LOL

Welcome, nice to have another CPA around to try explaining to everyone what they need to be concerned about. For a while I seemed to be the only one responding to a lot of tax questions from a "professional" standpoint.

Well, you know how it goes. “My buddy is saving millions on his taxes by [insert totally sketchy, incredibly aggressive nonsense]. So I want to do that too!”

To which I always respond: “Would you like to be cell mates with your buddy?”

Good lord, LOL!

You should go back and read some of the posts/threads after the 2018 South Dakota vs. Wayfair case, and how people are incensed about the sales taxes many of them now pay. Or one guy I got into a bit of an argument with about how his wife only sells a few things every year via Ebay, and he was telling me how she wouldn't ever have had to collect and remit sales tax, so Ebay shouldn't be charging it. I asked him if his wife ever sold anything to a customer in the same state they lived in, because if she did, then she had sales tax nexus and should have been collecting and remitting sales tax to their home state on those same in-state sales all along before Ebay took over. He thought I was nuts. LOL

Or I've explained to people how when they just trade cards, that is still technically deemed a sales transaction by the IRS, and is supposed to be reported as a taxable sale by both parties to the trade on their tax returns.

This lowered 1099-K reporting threshold that started this year is another issue many people who sell things on Ebay take exception to as not being right, and is supposedly them getting attacked by the IRS. I've tried telling people they were supposed to be reporting these sales activities all along, but many of them think that if they didn't get a 1099-K under the old reporting threshold limits ($20,000 and 200 or more transactions) that meant to them that they didn't have to file and pay any taxes on income they may have made at all.

Same thing with many people and paying use taxes on items they used to buy on Ebay, before Ebay started collecting sales taxes on everything, or won from auction houses that haven't started collecting sales taxes for whatever state they live in yet. A few people get ticked off when you remind them they are supposed to have voluntarily been paying that use tax in for all the years they've been buying stuff with no sales tax being charged to them.

I don't tell people what to do, but I do tell them what the law says they are supposed to do. What they personally choose to do is up to them. But I always figured that at least the more they know, the better off they'll end up being in defending themselves should they ever get into it with the IRS. I've always tried to fully explain to clients what they are supposed to do, so that way if they end up getting caught by the IRS for something they decided not to tell me about, they can't come back at me and say I never told them about it. Some people never learn or listen. LOL

Funny thing happened on the way to a baseball card chat board: an accounting seminar.

Carry on.

Adam, I believe you meant to say, "Income Tax 101 Seminar." :)

Thank Joe Biden. He's turned a hobby into a business for us all.

Take the politics elsewhere; not appropriate here.