Taxes ? on Auction House Consignments

[Rhotchkiss]

Time out, I think there is some potentially dangerous advice being given out here. To qualify, I am a tax attorney by trade, with a masters in tax law from Georgetown; although I gave that racket up 16 years ago. I have not actively practiced for a long time and I am hardly an expert on the taxation of collectibles. But here is what I think:

Baseball cards can be considered collectibles. It will be considered a collectible if it was purchased for investment. This is a determination based on the taxpayer’s intent. A business that deals in cards does not buy cards for investment. Rather, they buy cards for resale (it’s inventory), which leads to different, and potentially worse, tax results (I.e., ordinary gains, which are often higher than 28%). This is one of the many reasons I would be weary about establishing an LLC or other business entity. Whether to collect through a business entity is a whole separate topic and I won’t go into that here except to say that it’s probably unnecessary or a bad idea for most of us. Assuming the card is not acquired by a business entity......

A card will be considered a collectible based on the intent of the acquirer. Cards are tough, so let’s use an antique car instead: you have a much better argument that you had investment intent If you buy the car and store it somewhere safe for 10 years than sell it vs you drove it around all the time, showed it off at car shows, and then sold it; the latter looks more like acquired for personal enjoyment than investment. If the item was acquired for personal use, you may have gains nevertheless, but it will be at ordinary rates; you likely will not be entitled to claim losses.

If the item is considered a collectible, and it was held over 1 year, it will be taxed at a maximum rate of 28%. You will be taxed on the amount recognized, which means gross sales price, minus your basis (acquisition costs) plus all costs (these get capitalized to the asset). So, if I bought a card for $500 and paid 6% state tax and $25 shipping, my initial basis is $555. If I hold it for a year or more and the sell it for a gain- lets say I sell for $700- I am liable for tax on $145 ($700 realized minus basis). You can net losses against gains, and sometimes you can bet normal longterm capital losses against longterm collectible gains, and vice versa, but this gets complicated.

We live in a country that depends on self reporting. You are supposed to report income/gains and pay taxes on that income/gains. If you don’t, the IRS may never find out. But if they do, you may get in trouble and pay penalties and interest on top of the tax you owed; and rightly so. It’s your choice whether you report gains on cards.

BTW- collectibles were distinguished from other capital assets and the 28% rate was initially enacted based on the theory that collectibles are the purview of the wealthy and the wealthy can afford to pay extra taxes on these assets; in other words, it was a politically correct tax aimed at generating additional revenue off gains in assets normally owned by the wealthy; as opposed to stock or real estate, which is more “common”. Opinions about this aside (I don’t mind the logic), it will be interesting to see what, if any, changes are made to the taxation of collectibles under a democratic administration seeking to amend the tax code.

[Eric72]

So, here's a situation most of us (presumably) will find ourselves in.

I bought a card at a show...paid cash, no receipt. For the sake of argument, let's say I paid $200. I keep a record of the sale; however, have nothing other than my spreadsheet (and maybe an ATM receipt) to show what and when I paid for it.

Fast forward a year or more. I now sell the card on eBay or some similar online site. Let's say I net $250 after fees and shipping.

Do I pay taxes on the entire $250 - or - does my record-keeping, along with self-reporting correctly, allow me to only pay taxes on the $50 gain?

[Bicem]

What Ryan said.

[Rhotchkiss]

Originally Posted by Eric72

So, here's a situation most of us (presumably) will find ourselves in.

I bought a card at a show...paid cash, no receipt. For the sake of argument, let's say I paid $200. I keep a record of the sale; however, have nothing other than my spreadsheet (and maybe an ATM receipt) to show what and when I paid for it.

Fast forward a year or more. I now sell the card on eBay or some similar online site. Let's say I net $250 after fees and shipping.

Do I pay taxes on the entire $250 - or - does my record-keeping, along with self-reporting correctly, allow me to only pay taxes on the $50 gain?

You pay taxes on $50. That’s what your net gain is, or gain recognized. If you are audited, your spreadsheet plus the eBay receipt is fine proof of basis and net sale proceeds; in fact, the spreadsheet can be great proof if it is meticulously -and contemporaneously maintained.

[Eric72]

Originally Posted by Rhotchkiss

You pay taxes on $50. That’s what your net gain is, or gain recognized. If you are audited, your spreadsheet plus the eBay receipt is fine proof of basis and net sale proceeds; in fact, the spreadsheet can be great proof if it is meticulously -and contemporaneously maintained.

Thanks, Ryan. I appreciate you weighing in on this.

[insidethewrapper]

John above stated the tax law changed in 2018 and you have to pay taxes on the entire $ 250 ( not the Net) if you are not a business in the example stated above. Net is for businesses only. So I'm reading 2 different things on here. Guess I need a tax expert about the current laws to determine who is right.
Business : Sale - cost of goods, etc = Net Profit ( Use Schedule C )
Collector(Non business): Tax on Gross or Net Sale of item ???

[steve B]

If you are a business, there may be other taxes to consider. My city has a tax on a business inventory as long as it's held in the city. Sort of panicked me when I found out, since I'd briefly had a resale certificate, and lots of "stuff" which a taxman might consider to be inventory since I'd sold stuff in most categories of collectibles. T say nothing of the random assortment of rusty metal rods, wood pieces, other random metal pieces etc that I sometimes make things out of.

[Casey2296]

Originally Posted by steve B

If you are a business, there may be other taxes to consider. My city has a tax on a business inventory as long as it's held in the city. Sort of panicked me when I found out, since I'd briefly had a resale certificate, and lots of "stuff" which a taxman might consider to be inventory since I'd sold stuff in most categories of collectibles. T say nothing of the random assortment of rusty metal rods, wood pieces, other random metal pieces etc that I sometimes make things out of.

Nothing worse than paying annual possessory tax to the local gendarme on that Oak table from the 1980's cuz it's too heavy to take to the dump.

[Rhotchkiss]

Originally Posted by insidethewrapper

John above stated the tax law changed in 2018 and you have to pay taxes on the entire $ 250 ( not the Net) if you are not a business in the example stated above. Net is for businesses only. So I'm reading 2 different things on here. Guess I need a tax expert about the current laws to determine who is right.
Business : Sale - cost of goods, etc = Net Profit ( Use Schedule C )
Collector(Non business): Tax on Gross or Net Sale of item ???

You are big boy, capable of deciding whether or not to report taxable gain, capable of deciding whose tax advice on a baseball card message board to follow, and capable of googling your query and finding the answer out for yourself. But just bc I am capable of using a search engine myself, here is one (of a zillion) articles I found (much cheaper than a “tax expert”, which btw, I am (or was)):

https://1040return.com/collectibles-tax-collector/

[swarmee]

Originally Posted by insidethewrapper

John above stated the tax law changed in 2018 and you have to pay taxes on the entire $ 250 ( not the Net) if you are not a business in the example stated above. Net is for businesses only. So I'm reading 2 different things on here. Guess I need a tax expert about the current laws to determine who is right.
Business : Sale - cost of goods, etc = Net Profit ( Use Schedule C )
Collector(Non business): Tax on Gross or Net Sale of item ???

If you record it as an investment, there may be additional ways of categorizing it on your taxes, as Ryan laid out. That's one reason I also recommended talking to an accountant.

[insidethewrapper]

https://www.nolo.com/legal-encyclope...rom-hobby.html

According to this article, since 2018 tax law ,if you are a collector ( hobby vs business) , you must report the total sale as income.

[Casey2296]

Ryan has some good points to consider. I'm no CPA so please consult one before you do anything, I do however qualify people based on their tax returns everyday. If you form an LLC you are telling the government I am in the business of buying and selling cards, it could be anything but lets stick to cards. As a business you are allowed to write off expenses against profits. Basic schedule C stuff on your 1040's. To be clear you are buying and selling cards as an investment in that scenario. Also be aware as a business the IRS requires you make a profit at some point, usually 2 of the first 5 years.

In the collectibles as an asset category you should consult an estate planning attorney. Think of a painting that you bought and hung on the wall for 30 years, that would not be an investment. Its value may go up, it may go down. As an asset of your estate the cost basis on things like real estate and other assets increase to current market value at time of death when your heirs inherit the assets.

Again, this stuff is complicated and can vary from state to state. Consult a professional before you do anything.

[russkcpa]

Originally Posted by Rhotchkiss

Time out, I think there is some potentially dangerous advice being given out here. To qualify, I am a tax attorney by trade, with a masters in tax law from Georgetown; although I gave that racket up 16 years ago. I have not actively practiced for a long time and I am hardly an expert on the taxation of collectibles. But here is what I think:

Baseball cards can be considered collectibles. It will be considered a collectible if it was purchased for investment. This is a determination based on the taxpayer’s intent. A business that deals in cards does not buy cards for investment. Rather, they buy cards for resale (it’s inventory), which leads to different, and potentially worse, tax results (I.e., ordinary gains, which are often higher than 28%). This is one of the many reasons I would be weary about establishing an LLC or other business entity. Whether to collect through a business entity is a whole separate topic and I won’t go into that here except to say that it’s probably unnecessary or a bad idea for most of us. Assuming the card is not acquired by a business entity......

A card will be considered a collectible based on the intent of the acquirer. Cards are tough, so let’s use an antique car instead: you have a much better argument that you had investment intent If you buy the car and store it somewhere safe for 10 years than sell it vs you drove it around all the time, showed it off at car shows, and then sold it; the latter looks more like acquired for personal enjoyment than investment. If the item was acquired for personal use, you may have gains nevertheless, but it will be at ordinary rates; you likely will not be entitled to claim losses.

If the item is considered a collectible, and it was held over 1 year, it will be taxed at a maximum rate of 28%. You will be taxed on the amount recognized, which means gross sales price, minus your basis (acquisition costs) plus all costs (these get capitalized to the asset). So, if I bought a card for $500 and paid 6% state tax and $25 shipping, my initial basis is $555. If I hold it for a year or more and the sell it for a gain- lets say I sell for $700- I am liable for tax on $145 ($700 realized minus basis). You can net losses against gains, and sometimes you can bet normal longterm capital losses against longterm collectible gains, and vice versa, but this gets complicated.

We live in a country that depends on self reporting. You are supposed to report income/gains and pay taxes on that income/gains. If you don’t, the IRS may never find out. But if they do, you may get in trouble and pay penalties and interest on top of the tax you owed; and rightly so. It’s your choice whether you report gains on cards.

BTW- collectibles were distinguished from other capital assets and the 28% rate was initially enacted based on the theory that collectibles are the purview of the wealthy and the wealthy can afford to pay extra taxes on these assets; in other words, it was a politically correct tax aimed at generating additional revenue off gains in assets normally owned by the wealthy; as opposed to stock or real estate, which is more “common”. Opinions about this aside (I don’t mind the logic), it will be interesting to see what, if any, changes are made to the taxation of collectibles under a democratic administration seeking to amend the tax code.

Excellent post and I agree 100%. We just had a client in selling 4 cards in the current Heritage auction that should bring in $20K+ He was elated to hear that Heritage does not "1099" sellers. I clearly explained the law and what his obligation is. All I can do is put a note in the file and make him sign his Income Tax Questionnaire.
Russ