Friends giving up collecting in 2023 - Post continuation

[BobC]

Originally Posted by Fred

Adam, are you a tax attorney?

I never really thought about it the way you described (frigging great idea). I wonder if the losses (as described in your post - $500K) could also be used to offset stock gains? If so - wow, seems like something to consider when planning investment strategies.

Well, I guess we'd be planning strategies for our families because for them to inherit the stuff, we'd have to be dead...

Fred,

Before you go jumping for joy at the ideas presented, keep in mind that the situation presented about the Jordan card is an absolute extreme, and the chances of lucking out and having such a situation occur are probably about the same as winning the lottery. For things like stocks that are inherited, there is a stock market to easily set a then current value on the day someone passes. For other assets without such perfect, liquid markets, you can't just necessarily say it is worth what you say it is. If significant value is involved with non-liquid, non-cash estate assets, the estate Executor is most likely going to need to get an actual, licensed appraiser involved as part of their obligation to file an estate tax return. And if the estate isn't even close to large enough to where a federal estate tax return is required to be filed, the Executor may still want to look into an appraiser to value some of the more valuable non-cash assets so the heirs don't run into potential tax issues down the road. Like the IRS seeing someone claim a $500K loss on their tax return from selling a single card. And even if the party can point to a single sale around the time the decedent leaving them the card passed, the IRS may still take exception to that simplistic valuation given the nature and volatility of the collectibles market, and call in an appraiser of their own.

The article Nic linked to goes on about basically the same thing I've been telling people all along here on the forum as to how there are basically three different types of taxpayers people that are into cards can be treated as for tax purposes. As either a Collector/Hobbyist, as an Investor, or as a Seller/Dealer. And I've also said I believe it is possible for someone to actually be all three at the same time. They just have to keep really detailed and accurate records to back up and support how they may have cards as part of a business inventory, another group as part of a personal collection, and even another group held as potential investments. I'm not even going to try and explain all the nuances and differences here. Just understand that they can, and do, exist.

And as for that potential $500K loss being a tax deduction, that would only be in the case of the taxpayer claiming the loss being treated as either an Investor, or as a Seller/Dealer in an actual business. If an Investor, the loss would be a long-term capital loss, and the taxpayer could offset any other net long-term capital gains on their return that year, dollar-for-dollar, against the $500K loss. Any leftover loss would then be allowed on the taxpayer's current return up to $3,000 against all other taxable income. And if there was still any remaining, unused loss from the $500K, that would get carried forward to be deducted against net long-term capital gains on future returns, plus an additional $3,000 deduction against all other taxable income per year, until the entire $500K is finally used up, or the person passes away.

If the person is a Dealer/Seller in a business, the $500K is a business loss deductible against all income, not just capital gains. But the party inheriting the card would have had to have been in business to try and take advantage of that.

Most likely, the person inheriting the card was neither a Seller/Dealer nor an actual card Investor. In which case the IRS would look to treat them as a Collector/Hobbyist selling a collectible card. The max federal tax rate on a long-term capital gain from the sale of a collectible card in that case is currently 28%. But for any cards sold at a loss, there is no loss deduction or carryover allowed on the sale of a collectible. Something tells me that in the case mentioned, the person would walk away with their $200K cash from the sale, and with no income tax owed on it, and that is it.