As April 15 approaches ... more tax questions

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Posted By: Joann

I know there have been tax threads before, but these are new questions as far as I know.

I didn't make a whole lot in 06 selling cards, but did end up making some (and almost all of it went back into cards). I plan to claim it as ordinary income under "other income" on the 1040 form, and as "income from activity not engaged in for profit".

Questions:

Is it better to use 1250 Sale of Collectibles? It's not a whole lot of money, and I will pay more tax by claiming it as ordinary income than the 28% collectibles rate. I'm thinking I'd rather just claim it as ordinary income and keep my records and calculations attached to my personal copy of the return (in case of audit) than have to find another form. This should be okay, as long as I'm paying a higher rate, right?

IRS says that hobby expenses are deductible only to the extent of hobby income. I don't plan on deducting ebay fees, etc, but do some of you others deduct expenses (not as an itemized deduction, but as an offset to income before you report the income)?

Do you also offset losses from card sales, and grading fees?

Thanks to anyone who has snored their way to this point of the post and feels like ringing in.

This is the first year I've really sold cards, and I ended up a little bit ahead - and I definitely plan to claim it as income. No way I want to get off on the wrong foot in that area.

Joann

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Posted By: Eric B

I know there have been tax threads before, but these are new questions as far as I know.

I didn't make a whole lot in 06 selling cards, but did end up making some (and almost all of it went back into cards). I plan to claim it as ordinary income under "other income" on the 1040 form, and as "income from activity not engaged in for profit".

Questions:

Is it better to use 1250 Sale of Collectibles? It's not a whole lot of money, and I will pay more tax by claiming it as ordinary income than the 28% collectibles rate. I'm thinking I'd rather just claim it as ordinary income and keep my records and calculations attached to my personal copy of the return (in case of audit) than have to find another form. This should be okay, as long as I'm paying a higher rate, right?

IRS says that hobby expenses are deductible only to the extent of hobby income. I don't plan on deducting ebay fees, etc, but do some of you others deduct expenses (not as an itemized deduction, but as an offset to income before you report the income)?

Do you also offset losses from card sales, and grading fees?

Thanks to anyone who has snored their way to this point of the post and feels like ringing in.

This is the first year I've really sold cards, and I ended up a little bit ahead - and I definitely plan to claim it as income. No way I want to get off on the wrong foot in that area.

If you did not show a profit in 3 out of 5 consecutive years, then you can use the other income line of the 1040. And yes, you can deduct related expenses up to the amount of your income. But only if you itemize using schedule A which almost everyone does who owns a home.

The question is - how do you determine income? If you purchased a card for $1,000 a few years ago, then sold it in 2006 for $2,500, then your income is $1,500. If you paid $200 fees on the sale you can deduct those and therefore your other income is $1,300. You would do the same calculations for every card you sold during the year. And you can subtract losses too, as long as you don't get below zero in total of all your transactions. BTW, you should deduct fees - the IRS wants you to pay your fair share and this is a fair deduction.

Now here's where people can get in trouble. Let's say you sold that one card for $2,500 which resulted in income of $1,300 after fees. So then you purchased another card for $800. Many would say they now have income of $500 for the year. But that's not true. Your income is still $1,300 and you have a basis (think inventory cost) of $800 that you use to calculate income in another year when you sell that card.

This is the recommended way to do it. I have never heard of Form 1250 so I assume there are many limitations to that. If you have been making a profit for several years, it is considered a business and you use Schedule C. The calculations are the same, but there is more visibility to the IRS, not just a single number on a single line using the other method.

By the way, here is a legitimate tax planning method to lower taxes. Same example with income of $1,300 that is taxable income. But you remember you purchased a card for $1,200 years ago that turned out to be a reprint. Sell it for $1! You have a loss of $1,199 that you can apply to your $1,300 so you only have to pay taxes on $101. If you sold the reprint in a year you didn't have income, that deduction would be wasted. Those are tricks (albeit a simple one) that makes Accountants valuable to Corporations.

I hope this was brief and understandable.

Eric

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Posted By: Eric Brehm

Joann, this is not a simple matter. There are apparently some gray areas in the law, concerning how baseball card profits (and losses) are taxed. You might want to peruse a recent thread that explored this topic:

http://www.network54.com/Forum/153652/thread/1172503663/last-1172601496/Are+baseball+card+transactions+taxable-

edited to fix link

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Posted By: Joann

Eric,

Thanks so much. I'm doing it right in that I am looking at profits on each card, regardless of what I do with the money (like buy more cards). I have a spreadsheet that shows when I bought each card and for how much, and that's the basis going forward for whenever, if ever, I sell it.

Maybe I should go back and calculate my ebay fees (easy enough to get the 5% of total of ebay sales last year), etc.

This was the first year I sold cards, so no profit last 3/5 years. But I did download and print out the pages from irs.gov that discusses that test and the change in status it brings.

Oh, and 1250 is a code section relating to capital gains, but not collectibles. Duh. Collectibles is in the IRS code on capital gains for items held for more than one year. Might be section 408. I'm better off just using the other income line I think.

Thanks for your detailed and helpful response. I liked the suggestion on offsetting gains with large losses when it makes sense. If I ever end up with a real dog of a card (hasn't happened yet, thank goodness) I'll keep it in mind.

Joann

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Posted By: Eric Brehm

I spoke to a capital gains person at the IRS yesterday and was told this:

(1) Baseball cards are definitely considered 'collectibles' as defined in section 408(m) of the US tax code. This means that long-term capital gains (cards held for more than one year) are subject to the 28% tax rate. Short-term gains are taxed at ordinary income tax rates.

(2) Baseball cards are not considered 'personal use' property; thus capital losses can in fact be deducted, or used to offset gains on other transactions.

I am listing my baseball card sales and gains/losses on Schedule D. To compute cost basis I start with the purchase price, then add costs of purchase and sale, including shipping costs, eBay fees, and PayPal fees. The capital gain (or loss) is then the sales price less the cost basis.

For a broader view on this subject, see Matt's post near the end of the above-referenced thread. I'm not sure he entirely agrees with (2) above, at least not in all circumstances.

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Posted By: Dave F

What is the realistic amount you have to "make" before filing? If you sell one $100 card in the year...you have to file that?

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Posted By: DaveW

I'll add my comments, but notice that I'm an engineer, not an accountant.

On any tax return, the IRS will check your math and to some degree cross match W4's and 1099 forms to see that you included all your income sources. Only later will they consider an audit.

In the case of cards, Matt gave a wonderful summary of the tax laws in the N54 link. These cards are collectables, so you only drop to 28% rather than 15% for long term.

You get to choose what category you fall into: business, investor, owner. (I'm paraphrasing from memory, please read Matt's post.) If you aren't a card shop or internet card dealer, you can eliminate the first. The choice between the second and third comes into play if you want to combine losses and gains to get your total income, in which case you want to be an investor.

In the case of an IRS audit, and they think you've been too liberal in your deductions, you can either further dispute the ruling, or pay what they say you owe. This will be the taxes you would have paid originally plus a minor penalty. But, they won't think jail unless they can prove that you were truly fraudulent in filing your return. An interpretation error won't get you to jail. And this topic is subject to major differences in interpretation.

I'd always claim these cards as an investment, so losses would be allowed, and I would deduct the ebay fees from any transaction. Those are legal expenses associated with your investments, and can be deducted from gains.

The fact that you're reporting the sales and paying is a big plus, let the IRS take action beyond that. The chance of an audit is low, and the outcome can be one of two things: Either nothing, or they find you've been to aggressive, and you have to pay what you would have originally, plus a small penalty. I think the penalty is something like 10 - 15 % of the amount due. That is small to me compared to the low probability of an audit.

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Posted By: Eric B

For many (most?) people the other income line method is easier and you need to make over $150K (approximate with average itemized deductions) to benefit from the 28% capital gains rate.

One thing I always wondered about is if you can deduct interest on credit cards (at your highest rate) up to the amount of your total average inventory costs for the year.

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Posted By: Chris

"The fact that you're reporting the sales and paying is a big plus, let the IRS take action beyond that. The chance of an audit is low, and the outcome can be one of two things: Either nothing, or they find you've been to aggressive, and you have to pay what you would have originally, plus a small penalty. I think the penalty is something like 10 - 15 % of the amount due. That is small to me compared to the low probability of an audit."


I got hit w/ interest and a penalty on 10K...it was 25%. Luckily it was an oversight by the IRS, and I didn't have to pay.

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Posted By: Matt

Joann-
While putting the income from the sale of your cards on the “Other Income” line is better than not putting the income on at all, it is not the proper place to put the income from a business or investment sales.

If you do consider your sales a business the income should go on a Schedule C. If you consider the income sales from investments it should go on Schedule D.

If you put the sales on Schedule C, you show your total sales on the income line and subtract the cost of goods sold (your purchase price and expense of sale). You would also deduct all your expenses relating to your business. (see the hobby loss rules from the other post, but as long as you have net income the hobby rules won't matter)

On Schedule D you show your sales price in the “proceeds” box and your “basis” in the cost box. Your basis is what you paid for the card plus any cost holding the card (grading fees) and any expenses of the sale (ebay and shipping).

As for the Code section you mentioned -1250- it does not apply here. That section (and 1231 and 1245) deal with the sale of assets “used in a business”. If you consider your sales a business these are not assets “used in a business” but rather inventory. For instances if in your baseball card selling business you owned a display case or a trailer to haul around your cards to shows and you decided to sell these assets, you would be selling assets “used in your business” and not inventory. Inventory sales are ordinary income and assets used in a business may receive “capital gains” rates.

Eric – I agree, since the difference between “personal use” and investment is merely intent, then at the time of sale, your intent would be "held for investment". So baseball cards should be considered “investment property” (unless it is a sale of inventory - see other post)

As for whether to report or not, everyone is entitled to their opinion, but as a licensed CPA I can only recommend all sales, no matter how small should be reported. The chance of being audited, no matter how small, should have no effect on your decision (i.e. playing the audit lottery) on what to report. This is a self reporting system. You won’t win any points with the IRS by doing what is required by law. And ignorance of the law is no excuse for not reporting.

The most important thing to do is keep good records of your purchases in order to prove your “basis” with the IRS. Otherwise you run the risk of the IRS claiming that the entire sales proceeds are gains as opposed to just the difference between the sales price and what you paid for the card (and expenses of sale) being the gain.


Hope this helps and let me know if you have any other questions.

(edits for spelling)

(As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this post, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.)

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Posted By: Eric B

Oh, yeah....I want to add the following...

(As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this post, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.)

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Posted By: George Dreher

All transactions of 10K or more fall under the auspices of the Currency Reporting Act, so a report will be generated and sent to the IRS by bank, PayPal, or credit card company.

Transactions less than 10K? If you're going to deposit it into an account and let it sit there, then you would be wise to report it as income.

Just my two cents worth.