Quote:
Originally Posted by Rhotchkiss
Bob, I just took a deep dive into the topic. Two things I did not realize struck me as particularly noteworthy and worth posting about:
1. Only “investors” in collectibles may take a capital loss on the sale of a card (if sell for a loss). All you avowed collectors, who expressly state your collections are for enjoyment and personal use only, have publicly announced to the IRS that you are not entitled to a tax loss on the sale of a card. Just hope things keep going up! Or, like some of us, admit that you buy cards for investment, and you have strong proof of intent and thus entitled to take losses. You must recognize gains (at 28%) regardless of whether you own cards for investment or as a hobby. But only investors, and not collectors, can take losses.
2. Those who are in the business of buying and selling cards do not get 28% gains treatment, but instead have ordinary gains and losses from business operations. For many, ordinary tax rates are higher than 28%. This begs the question: are those who obtain retail sales certificates (to avoid paying state taxes), effectively declaring they are in the trade or business of selling cards and thus subjecting themselves to ordinary gain, rather than 28%?
Assuming the answer to the 2nd question is “yes”, seems the best tax move currently for individuals (not dealers) is to post on message boards that you invest in cardboard and don’t get a resale certificate to avoid state taxes.
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Hey Ryan,
If you go back through my numerous tax related posts, you'll find I've mentioned exactly what you're saying in your point #1 several times about how only investors get to deduct capital losses from card sales, and not collectors. And you are absolutely right about not posting about being a collector on a public forum like this if you ever hope to be able to deduct a loss from a card sale as an investor. Same goes for posting pictures of your man caves on here, and the stuff you have displayed. I've also posted numerous times now that the easiest way to tell an investor from a collector is that a collector displays his cards on the walls or shelves in their office or man cave, while an investor keeps their cards in a vault or safe deposit box.
And just to be very clear, 28% is the max long term capital gains federal tax rate on the sale of cards, whether you are a card investor or collector. You do not just pay a flat 28% long term cap gain tax on net profits from card sales. It depends on a lot of other factors, like if you have any other capital losses to offset against gains from card sales, what taxable income you have, your filing status, what tax bracket you end up in, and so on. And also, that 28% max rate only applies for "long term" net capital gains from card investment/collectible sales. That means you had to have owned a card for at least one year, or more, for it to be a long term capital gain (or loss). A net "short term" capital gain from the sale of a collectible/investment card owned less than twelve months is treated and taxed as ordinary taxable income, just like W-2 wages, and is subject to federal income tax up to the current max individual rate of 37%.
And as to your point #2, I've also numerous times posted how dealers do not get the max 28% LT cap gains fed tax rate on net profits from their business' card sales. It is ordinary taxable income, subject to a max federal individual income tax rate currently at 37%, but that is only if the business net income ends up getting taxed on a person's individual income tax return. If you set up your business and have it taxed as a C-Corporation, the corporate entity actually pays the tax at a flat federal tax rate of 21% on every dollar of net business income. Also, in the case of net business profit that does end up on your personal income tax return, please be aware that in some cases that net business income may also be subject to additional self-employment taxes (social security and Medicare) of upwards of an additional 15.3% tax on your net business income, on top of the up to 37% federal income tax you may owe on it already. And I'm not going to even get started on the potential impact of Obamacare taxes on excess earnings and net invest income.
But you are absolutely right that someone wanting to be treated as a collector or investor for income tax purposes someday, at a max fed LT cap gains rate of 28%, should not go out and be getting a resale exemption certificate so they don't have to pay state sales tax. Especially if cards they are now selling and want to treat as collectible/investment sales, and not business sales, were purchased using that sales tax exemption certificate. Cards purchased using a resale sales exemption are supposed to going into a business inventory, not someone's collection or investment portfolio.
And unfortunately, for a lot of people who are suddenly going to start getting these 1099-K forms next year for cards/items they're selling, the initial thinking by the tax authorities is likely to be that you're a dealer in business selling cards/items, not a collector or investor. So as I've suggested numerous times now, it may behoove a lot of these soon to be affected people to talk with a qualified tax professional, especially one knowledgeable of the state they're in, to discuss and plan what might be the best way to plan for and handle this for tax purposes going forward.
So Ryan, how deep did you dig? Once you jump in, it's almost like a bottomless pit with all the tax related rules, options, and so on, isn't it? LOL Welcome to my world, and be glad we're not talking about state, local, or any other oddball taxes, as well!
Anyway, I still can't believe you hadn't already picked up both points from many of my numerous earlier tax related posts. I figure you either just lucked out and missed reading them, or I put you to sleep with all the technical crap I had crammed in them before you got to the parts where I covered the points you're now bringing up. LOL
As I've said numerous times now, for tax purposes in regards to our hobby, you can end up being treated as a Dealer in business, an Investor, or as a Collector/Hobbyist. And I feel you can be more than one, or even all three of them, at the same time, as long as you keep adequate records and your business inventory, investment portfolio, and card/item collection separate and properly documented.
Have a good one!