Starting an Ebay Business

[Gusturd]

Not sure if this is the correct spot for this type of question. My apologies if it's not. I was wondering what are the necessary steps to make the transition from being a casual ebay hobby seller to becoming a sports card/memorabilia business? I know there are many here who have businesses on ebay and I'm hoping they can share their knowledge.

If I decide to sell my collection in 2021 on ebay, how would this be classified? Can I become a business and pay taxes as a business or do I have to pay taxes as a hobby?

If it matters, this would be something I do in my spare time and I suspect it would take several years or longer to liquidate everything. And I don't rule out continued buying along the way as a way to make a few bucks as I enter retirement.

Any tips would be greatly appreciated.

[D. Bergin]

Speaking as "Not an accountant"..........you should probably talk to an accountant.

But..........If you plan on doing it long term, and showing a profit from year to year, it would probably benefit you to run it as a business, rather then a hobby. It will open you up to more write-offs against your gains.

Biggest question is, do you want to do all the extra paperwork and record-keeping that comes with that? Is that worth the hassle, rather then just boxing up all your stuff, sending it to an auction house, and paying the capital gains tax on top what you claim to have originally have paid for your collection.

[Directly]

Next year Ebay and Paypal will begin reporting sales over 600.00 to the IRS. That said if a seller sells say 10,000 on Ebay in 2022, which is easy to do--and didn't report sales from the past, this might create a RED FLAG for a future audit--??--enjoy your retirement!

[Gusturd]

Originally Posted by Directly

Next year Ebay and Paypal will begin reporting sales over 600.00 to the IRS. That said if a seller sells say 10,000 on Ebay in 2022, which is easy to do--and didn't report sales from the past, this might create a RED FLAG for a future audit--??--enjoy your retirement!

Thank you. I hope to.

Every new business has a first year don't they? Is that really a red flag?

[MooseDog]

Art - it's really not as hard as you would think. The main thing is intent...if you just set up a business for selling your collection over time, there is a (very small) chance you can run into problems in terms of hobby vs. business in the eyes of the IRS...now if you still continue to buy and selll, with the INTENT of making a profit, you're good so long as you show a profit in 2 of 7 years (I think, could be old info).

Basic steps:

1) Inventory your collection as it will be your starting inventory for your business. Record cost and market value for everything you intend to sell (no you don't have to do each individual common card but you can group things like (1956 Topps Baseball Commons 55 @ $1.50)

2) Spend a little money for an hour or two consultation with an lawyer, accountant or tax expert, in order of preference. Around my area it's easy to find a lawyer/CPA maybe not so much in yours. Explain what you want done, have them help you set up an accounting system and what records you need to keep. They can also explain what paperwork you need, what deductions you can take, etc. Best of all any fees they charge you are a business expense!

3) Keep hobby assets and business assets separate. Likewise, have a separate checking account for business.

The better records you keep and the more you "act" like a business the less likely you'll run into any issues.

[Gusturd]

Originally Posted by MooseDog

Art - it's really not as hard as you would think. The main thing is intent...if you just set up a business for selling your collection over time, there is a (very small) chance you can run into problems in terms of hobby vs. business in the eyes of the IRS...now if you still continue to buy and selll, with the INTENT of making a profit, you're good so long as you show a profit in 2 of 7 years (I think, could be old info).

Basic steps:

1) Inventory your collection as it will be your starting inventory for your business. Record cost and market value for everything you intend to sell (no you don't have to do each individual common card but you can group things like (1956 Topps Baseball Commons 55 @ $1.50)

2) Spend a little money for an hour or two consultation with an lawyer, accountant or tax expert, in order of preference. Around my area it's easy to find a lawyer/CPA maybe not so much in yours. Explain what you want done, have them help you set up an accounting system and what records you need to keep. They can also explain what paperwork you need, what deductions you can take, etc. Best of all any fees they charge you are a business expense!

3) Keep hobby assets and business assets separate. Likewise, have a separate checking account for business.

The better records you keep and the more you "act" like a business the less likely you'll run into any issues.

Thanks for this. I will definitely engage a professional before starting. A couple things I was wondering:

1) I have kept a spreadsheet for about the past 10 years of what i've spent on most of my significant purchases. Can I use that to inventory my collection? I have virtually no receipts except for maybe old invoices for items won from auction houses. For items not on the spreadsheet, can I estimate what I paid?

2) If I only sell on ebay, do I have to pay self employment tax? That seems to be another sizable chunk out of the pie and makes me wonder what's left for me.

[Gusturd]

Originally Posted by D. Bergin

Biggest question is, do you want to do all the extra paperwork and record-keeping that comes with that? Is that worth the hassle, rather then just boxing up all your stuff, sending it to an auction house, and paying the capital gains tax on top what you claim to have originally have paid for your collection.

This is the question I've been struggling with and trying to research the ramifications of either approach has left me more confused than anything else.

Someone please correct me if I have this wrong. The way I'm understanding it, if I took my entire collection to an auction house and it sold for 100K (wishful thinking but for simple math), I believe I'd have to report that all is income and thus pay approximately 28K in taxes!?!?! There would be no consideration or netting out what I paid for the item. Is that correct? Or is only the gain taxable?

[Aquarian Sports Cards]

Originally Posted by Gusturd

This is the question I've been struggling with and trying to research the ramifications of either approach has left me more confused than anything else.

Someone please correct me if I have this wrong. The way I'm understanding it, if I took my entire collection to an auction house and it sold for 100K (wishful thinking but for simple math), I believe I'd have to report that all is income and thus pay approximately 28K in taxes!?!?! There would be no consideration or netting out what I paid for the item. Is that correct? Or is only the gain taxable?

Even as a hobbyist you can write off your original cost of acquisition so if you spent $60k and sold for $100k you would be taxed on $40k

[Gusturd]

Originally Posted by Aquarian Sports Cards

Even as a hobbyist you can write off your original cost of acquisition so if you spent $60k and sold for $100k you would be taxed on $40k

Ok...That's great info. Thank you. But what if instead of a one time event, I pieced the collection out a little at a time and instead sold $20K a year (say with 8K profit) for the next 5 years. Could I still be considered a hobbyist?

[hcv123]

1) As Scott said you are only supposed to pay tax on your gain/profit over what you paid for the item(s). Hobby = gain, business = profit. A consideration - if you have held the cards for longer than a year , I believe your gain would be taxable at the capital gains rate whereas if you have a business - income doesn't get capital gains rate treatment.
2) While receipts are better, a detailed list with as much detail as possible is a good second alternative - only comes into play IF you get audited.
3) THE important question - are you looking to sell your collection or really start a business? Probably not worth starting a business with the sole purpose of selling your collection. You need to give some serious thought to this.
4) SHAMELESS SELF PROMOTION - I accept private consignments on a commission basis - another alternative to doing it yourself or giving to auction co. Pm or email for more info.

[Gusturd]

Originally Posted by hcv123

3) THE important question - are you looking to sell your collection or really start a business? Probably not worth starting a business with the sole purpose of selling your collection. You need to give some serious thought to this.

This is something else I've been pondering quite a bit lately. My goal here is to simply realize as much money for my collection as I legally can. But quitting the hobby cold turkey seems a little too extreme at this point (to me...not my wife. She's 100% ready for me to sell). I figure piecing it out, would be a gentler exit, allowing me to downsize and free up some of the money, while not quitting overnight.

We've always viewed this collection as a means to someday enjoy retirement, travel, etc...so I'd like to choose the route that benefits us and that goal the most.

[joejo20]

Originally Posted by Gusturd

Any tips would be greatly appreciated.

eBay can be quite frustrating. The BST here is a wonderful option. Joe

[BobC]

Great question regarding what to do/report regarding taxes when one starts thinking about selling their collection, or some part of it. Unfortunately, everyone's situation and circumstances are different so there are no "one size fits all" type answers. And in this thread, like in the many similar threads over the years that discuss what to do regarding taxes when someone starts selling off their collection, lots of people start jumping in with answers and advice that don't know all the specific facts and circumstances, and end up giving advice and answers that aren't always accurate or the most advantageous to the person asking the question. The one piece of advice that is given that does make 100% sense is for the OP to consult with a tax professional regarding their own unique set of facts and circumstances in regards to the proper reporting and tax treament when he does start to sell off his collection.

The idea of whether someone is in a business or a hobby is not cut and dried and in certain situations can be elected/decided upon by the person starting to sell. You have to take into consideration the specific facts and details of each person's overall tax situation in making such a decision though, and then use that to decide the most advantageous and proper way to handle and report such sales for tax purposes. Even that reference and link to the Taxslayer site regarding the differences between a busines and a hobby isn't that helpful as it only gives "ifs" and "maybes" depending upon ones answers to the various questions posed, and likely raises even more questions than gives any definitive answers.

One thing I did want to point out though is that everyone seems to keep referring to two alternative treatments for the selling of their cards, either as a business or a hobby. There are actually three different alternatives, each with different tax treatment results. For the record, you can be a Dealer (in business), a Collector (in it as a hobby), or an Investor (someone into cards and holding them for appreciation and eventual sale for profit). So what exactly are each of you who are reading this thread? Chances are that from reading most of the posts and comments from a majority of the members on this forum over the years, they can be one, two or all three of these alternatives, all at the same time. For those of you that stick cards in your safe deposit box and keep them there for years, those would arguably be Investments. Then there are others who often post pictures of displays of their cards/collectibles they have in their home/office. Those would arguably be a hobbyist's personal collection as a Collector. And then there are others with boxes/binders of cards that they have acquired over the years from purchases and trades that they aren't so enamored with that they will treat as their inventory to sell and trade on an ongoing basis to fund other purchases or swap for other cards/items they want. Those would arguably be the inventory of a Dealer. So in reality, depending on how well someone keeps their records and items separate and accounted for, they can actually have different parts of their collections treated as Collectibles, Investments, or Dealer inventory, all at the same time. And this is why this can be so confusing and virtually impossible to give a simple answer to that covers everyone.

A few more thoughts and ideas to help and possibly correct some not always accurate advice given in this and other threads:

Collectors and Investors can treat gains on the sale of their cards held for one year or more like other long term capital gains, subject to a maximum federal tax rate of 28%. (The maximum long term capital gain tax rate on regular investments like stocks is 20%.) The gain on the net profit from cards sold is not taxed at 28% though if the seller's total taxable income on that year' return, including the long term gain from cards sold, leaves them in a tax bracket that is less than 28%. The seller would only end up paying tax on the long term gain from cards sold at the tax bracket rate they end up in, if it is under 28%. Often in threads people answer the question about tax on the sale of Collectibles and simply say they're taxed at 28%. It makes it sound like all the long term Collectibles gain is taxed at a flat 28% tax rate, which is not always true.

Also, if cards sold as Collectibles or Investments are not held for twelve months or more, any gains/profits from their sales are taxed at rates like other ordinary income (wages, interest, etc.) and there is no 28% maximum cap on the federal tax rate. You end up paying tax at whatever bracket rate you end up in, up to the current 37% individual max rate.

Cards sold as Collectibles or Investments have pretty much the same tax treatment as far as determing their cost basis, tax rate, and so on, with one major difference. If a card that is considered as an Investment is sold for a loss, you can offset that loss against gains from other Investments sold. If, however, you sell a Collectible card from your personal hobby collection at a loss, you cannot offset that loss against other Colllectible or Investment gains. You still report and pay tax on all the Collectible cards sold for a profit/gain, and end up eating the Collectibles losses.

This last thought is for those who like to also do trades. Technically the IRS considers all bartering transactions as sales and they are to be reported and taxed as such. So if you have someone who still has cards they got from buying and opening packs as a kid, if they were to trade one of those cards for another card(s) they now want from someone else, the current market value of the card(s) they traded for would be the selling price and the cost basis of the card they traded for it would be based on what they originally paid for the pack. That difference between the cost basis of the card being traded and the current FMV of the card(s) they got in return would be a taxable net profit/gain to handled and reported depending on if the item being traded was a Collectible, Investment, or Dealer inventory.

[Gusturd]

I can't thank everyone enough for chiming in and I can't believe there isn't more discussion of this topic on this forum. You'd think there'd be a permanent "How to" thread, as I'm guessing 100% of the people posting here (or their heirs) will face these questions at some point.

I've certainly learned a lot reading (and re-reading) the replies here and the clearer things become the more complicated they seem to become.

When it comes time to report these sales, would/could I actually report them three different ways? I'd see myself fitting all three categories. I have the cards I display, the cards I keep locked away and the cards I've just accumulated and don't care so much about that I would probably start selling with.

And I said I have a spreadsheet for most of my "significant" cards, but that doesn't cover everything. I've got plenty of memorabilia and lesser cards I'd have a hard time remembering where I got, never mind what I paid. How do you determine cost basis for that? Do you use "book value"? Ebay past sales? Guesstimate? What passes muster here and what doesn't?

Thanks again for the continued participation here. I'm sure I'm not the only one this information is helping.

[buymycards]

[QUOTE=Gusturd;2085300]I can't thank everyone enough for chiming in and I can't believe there isn't more discussion of this topic on this forum. You'd think there'd be a permanent "How to" thread, as I'm guessing 100% of the people posting here (or their heirs) will face these questions at some point.

There have been dozens of tax discussion threads over the years on this forum. Try a search for "taxes", "business taxes", etc.

[Gusturd]

[QUOTE=buymycards;2085301]

Originally Posted by Gusturd

I can't thank everyone enough for chiming in and I can't believe there isn't more discussion of this topic on this forum. You'd think there'd be a permanent "How to" thread, as I'm guessing 100% of the people posting here (or their heirs) will face these questions at some point.

There have been dozens of tax discussion threads over the years on this forum. Try a search for "taxes", "business taxes", etc.

No doubt there have been. But why have to go search, only to find each has ample amounts of outdated and/or inaccurate information? Why not have it pinned as a reference so people don't have to keep asking?

Thanks for your input.

[BobC]

Originally Posted by Gusturd

I've certainly learned a lot reading (and re-reading) the replies here and the clearer things become the more complicated they seem to become.

When it comes time to report these sales, would/could I actually report them three different ways? I'd see myself fitting all three categories. I have the cards I display, the cards I keep locked away and the cards I've just accumulated and don't care so much about that I would probably start selling with.

Yes it can be very complicated and confusing, without any easy, clear-cut answers. Also why it may make a lot of sense to consult a tax professional to review a person's unique set of tax facts and circumstances.

And yes, someone can have card sales under all three different options/treatments (Dealer, Investor, Collector) in the same year. Would need to keep proper records and such to do so. Not even unique to selling cards either. Think of a guy who buys and immediately flips and sells a house. That is treated as a sale of inventory subject to profit being treated as ordinary income. For that he's a Dealer. Same guy sells another house he had rented out for a number of years. Gain on this sale would likely get taxed as long term capital gain. So for that sale he's kind of like an Investor. And finally, he sells the house he lived in for years. Most likely any profit on the sale wouldn't be taxable, but if sold for a loss, he wouldn't get to use/deduct the loss on his tax return either. So for that house he's kind of like a Collector selling a personal asset.

I passed the CPA exam back in the 70's, and have been practicing ever since, and as such know a little of what I'm talking about. So if you have any questions, you (or anyone else) can just PM me and maybe exchange phone numbers to discuss further. It would be a lot faster and easier than all this typing. LOL

[Gusturd]

Originally Posted by BobC

Yes it can be very complicated and confusing, without any easy, clear-cut answers. Also why it may make a lot of sense to consult a tax professional to review a person's unique set of tax facts and circumstances.

And yes, someone can have card sales under all three different options/treatments (Dealer, Investor, Collector) in the same year. Would need to keep proper records and such to do so. Not even unique to selling cards either. Think of a guy who buys and immediately flips and sells a house. That is treated as a sale of inventory subject to profit being treated as ordinary income. For that he's a Dealer. Same guy sells another house he had rented out for a number of years. Gain on this sale would likely get taxed as long term capital gain. So for that sale he's kind of like an Investor. And finally, he sells the house he lived in for years. Most likely any profit on the sale wouldn't be taxable, but if sold for a loss, he wouldn't get to use/deduct the loss on his tax return either. So for that house he's kind of like a Collector selling a personal asset.

I passed the CPA exam back in the 70's, and have been practicing ever since, and as such know a little of what I'm talking about. So if you have any questions, you (or anyone else) can just PM me and maybe exchange phone numbers to discuss further. It would be a lot faster and easier than all this typing. LOL

That's a gracious offer Bob. Thank you.