Starting an Ebay Business

[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.