Cost basis - Warning tax related topic

[Stupe the Second Sacker]

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.

[raulus]

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!

[Smarti5051]

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).

[ValKehl]

Originally Posted by Smarti5051

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.

[Stupe the Second Sacker]

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.

[raulus]

Originally Posted by Stupe the Second Sacker

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!

[Stupe the Second Sacker]

Originally Posted by raulus

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!

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.

[steve B]

Originally Posted by Stupe the Second Sacker

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.

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.

[Stupe the Second Sacker]

Originally Posted by steve B

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.

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

[Smarti5051]

Originally Posted by ValKehl

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.

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.