Friends giving up collecting in 2023 - Post continuation

[Fred]

Originally Posted by Exhibitman

My understanding is that all property you inherit steps up in basis to FMV at the time of death (or the alternative valuation date, if the estate uses one). When you inherit and sell, the FMV is the basis to use when calculating gains or losses. if you inherited a PSA 10 Michael Jordan RC the day after one sold for over $700K your basis in the card is that auction price, and you could sell it at current market of about $200K and not only not pay income tax on the sale, you would have a loss carryover that would gobble up investment income for years to come.

How you sell can alter the outcome even more favorably; I will be addressing this in my column in the future. New posts go up Saturdays.

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...

[raulus]

Originally Posted by Fred

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.

Their ability to use the losses all depends. This article is helpful:

https://bradfordtaxinstitute.com/Con...ctivities.aspx

[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.

[Exhibitman]

I am not a tax attorney, I just research this stuff for my own planning and information.

All of these tax questions are both specialized and personal: do NOT take the word of some stranger on a chat board, see your own tax planner. What someone says here might not even apply to you.

Now, when it comes to fighting over your positions, that too is idiosyncratic. I can stand my ground against the tax people more than most because my cost of litigation is zero. If I had to hire an attorney I'd be much more wary of getting into a fight because the cost of fighting makes a winner into a loser.

As far as valuation goes, there is no explicit requirement that I have ever heard of for an appraisal by a specific form of appraiser, except in the charitable deductions area. Appraisals are just speculative opinions anyway. When my parents passed away, I found a series of insurance appraisals they got for various things and they were nowhere near market valuation. They were way off because they were a means of setting up a bigger insurance claim not of establishing a true market value. The tax opinions I've read on valuation disputes all basically amount to what we call a "whore fight": the IRS puts up one expert to say X, the taxpayer puts up another to say Y, and the court decides who has the better liar.

One further thing to consider: there is no need to liquidate right away. Unless there is a reason to quick sell, you can take your time and do it right.

[Fred]

Thank you for the responses. I wouldn't point blank take things I read on an internet chat board as gospel, but when it's coming from board members I feel have a clue, I'll definitely look at what was presented as probably closer to accurate, than not. There will definitely be research done on the thoughts/ideas imparted in the forum.

Somewhere in all this, I'll have to figure out if it'd be easier for me to sell it off before my ticket gets punched or try to formulate a plan for the family after they figure out the card board actually has more value to it than to make some old guy smile.

[Exhibitman]

If I don't need the money I would rather pass on the good cards to my daughter and let her take advantage of the step-up in basis (assuming it still exists) rather than my paying taxes on the gains. I do plan to liquidate the bulk/crap as I get older, mostly because I find dealing to be an enjoyable business venture and if I am lucky enough to be able to retire from law it will fill the days nicely. Plus, i can take business trips to exotic locales every August: Cleveland, Atlantic City, Rosemont, maybe even Baltimore some day. It's the stuff dreams are made of...very small dreams.