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Originally Posted by Lorewalker
Thanks, as always, Bob. Certainly is a gray area on the investor vs collector front, no? While most of us buy cards because we love them. We also know history has proven it is a safe place to park money. When we buy something we might not start thinking about the exit but selling is always a distinct possibility either to fund another card purchase or to pay for a kid's college education, etc etc. I doubt many of us buy thinking we will never sell anything we have acquired but maybe some here have made that commitment. I think it would be nearly impossible for the IRS to classify any of us as absolute collectors.
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Like I've said various times on here, and as that article I posted the link to points out, a very simplistic way to show a Collector versus an Investor is that a Collector/Hobbyist will have their items displayed and hanging on the walls or shelves in their man cave, while an Investor will likely have their items sitting in a bank safe deposit box or maybe one of these "vaults", like at PWCC or Goldin. In that article, they used artwork for the example, but the same result.
Aside from that easy difference, the lines really blur as to what differentiates a Collector from an Investor. It is really more intent than anything else, but how do you physically demonstrate or otherwise prove intent, aside from if you display or store your items? This is where the lines can blur and get real hazy.
One would expect a true Collector to have very few sales, whereas for an Investor, you might see more sales to take advantage of gains when they occur, or sell off items that are suddenly losing value (this is more of a modern card issue). But if you start having too many sales, then you might be looked upon like you're really a Dealer because of all your ongoing sales activity. And I still say, you can actually be all three (Dealer/Collector/Investor) at the same time. It is just that the different parts of your inventory/collection/portfolio all need to be kept separate from one another, and would require proper accounting and tracking of activities, sales and purchases for each of these separate parts.
How many people who are dealers also happen to have a personal collection, a lot of them, right? So what happens if they decide to retire and sell everything off? Does being a Dealer mean that they'll have to pay ordinary income tax on the profits from sales of their personal collection because it all gets treated as part of their Dealer inventory, instead of profits from their collection sales getting treated as capital gains, and possibly subject to a lower overall capital gains tax rate instead? Not if they keep track of things separately and can have records and such to show how they have a separate business inventory from a collection. And think about it. Say they sell their collection, and it brings in $100K of profit, which isn't that far-fetched for someone who's been collecting for 20-30-40 years and accumulated a lot of great items over those years. If they treat that as ordinary income from selling it as part of their business inventory, that will be subject to an individual federal tax rate of up to 37%, plus whatever they'll also owe on that profit for self-employment tax, which can be anywhere from 2.9% up to 15.3%, but for these purposes we'll use the low end of 2.9% and assume the taxpayer has already reached the max FICA limit for the year. So we'll say the federal tax is at 39.9%. (And I'm ignoring any additional Obamacare Surtaxes that may be owed for this example.) Meanwhile, if that $100K get treated as a gain from the sale of Collectibles, held for over a year so the gain is considered long term, the maximum federal tax rate on that $100K is 28%, and there is no self-employment tax on that. (And again ignoring any potential Obamacare Surtaxes.) So that is a potential federal tax rate difference of 28% versus 39.9% on $100K of profit/gain. You do the math and tell me which way you'd rather have treated your personal collection when selling it then for tax purposes.
And instead of selling everything when you retire, what if you have an accident/illness, and are suddenly gone. Now your surviving spouse/children/heirs have to deal with your business inventory and personal collection, and may really know nothing about either. At least if you keep some records and books showing how you have split and kept separate your business inventory from your collection, your heirs can use that to also take advantage of the lower potential federal LT capital gains tax rate on your collection. See, when you pass on, the attributes of what you leave your heirs go with those items. So the business inventory gets passed on as inventory, and when sold will generate ordinary income or loss. The personal collection will pass through as a hobby collectible/investment, and when sold will generate capital gains or losses. So keeping at least some semblance of records and separation of different parts of your collection and/or inventory, can also make life a lot easier for you family/heirs down the road as well after you're gone.
Hope this helps explain things.