eBay vault

[Rhotchkiss]

Bob, I just took a deep dive into the topic. Two things I did not realize struck me as particularly noteworthy and worth posting about:

1. Only “investors” in collectibles may take a capital loss on the sale of a card (if sell for a loss). All you avowed collectors, who expressly state your collections are for enjoyment and personal use only, have publicly announced to the IRS that you are not entitled to a tax loss on the sale of a card. Just hope things keep going up! Or, like some of us, admit that you buy cards for investment, and you have strong proof of intent and thus entitled to take losses. You must recognize gains (at 28%) regardless of whether you own cards for investment or as a hobby. But only investors, and not collectors, can take losses.

2. Those who are in the business of buying and selling cards do not get 28% gains treatment, but instead have ordinary gains and losses from business operations. For many, ordinary tax rates are higher than 28%. This begs the question: are those who obtain retail sales certificates (to avoid paying state taxes), effectively declaring they are in the trade or business of selling cards and thus subjecting themselves to ordinary gain, rather than 28%?

Assuming the answer to the 2nd question is “yes”, seems the best tax move currently for individuals (not dealers) is to post on message boards that you invest in cardboard and don’t get a resale certificate to avoid state taxes.

[Lorewalker]

Originally Posted by Rhotchkiss

Bob, I just took a deep dive into the topic. Two things I did not realize struck me as particularly noteworthy and worth posting about:

1. Only “investors” in collectibles may take a capital loss on the sale of a card (if sell for a loss). All you avowed collectors, who expressly state your collections are for enjoyment and personal use only, have publicly announced to the IRS that you are not entitled to a tax loss on the sale of a card. Just hope things keep going up! Or, like some of us, admit that you buy cards for investment, and you have strong proof of intent and thus entitled to take losses. You must recognize gains (at 28%) regardless of whether you own cards for investment or as a hobby. But only investors, and not collectors, can take losses.

2. Those who are in the business of buying and selling cards do not get 28% gains treatment, but instead have ordinary gains and losses from business operations. For many, ordinary tax rates are higher than 28%. This begs the question: are those who obtain retail sales certificates (to avoid paying state taxes), effectively declaring they are in the trade or business of selling cards and thus subjecting themselves to ordinary gain, rather than 28%?

Assuming the answer to the 2nd question is “yes”, seems the best tax move currently for individuals (not dealers) is to post on message boards that you invest in cardboard and don’t get a resale certificate to avoid state taxes.

Resale Licenses only permit avoidance of paying state sales tax which is different than state tax.

[Rhotchkiss]

Originally Posted by Lorewalker

Resale Licenses only permit avoidance of paying state sales tax which is different than state tax.

Yes, and the basis for avoiding state tax is because you are buying to resell and thus are in a trade or business.

In other words, only people in the business of buying cards for resale should get the license. Thus, by getting the license you are providing proof that you are in business not a mere collector, should the IRS audit you

[BobC]

Originally Posted by Rhotchkiss

Bob, I just took a deep dive into the topic. Two things I did not realize struck me as particularly noteworthy and worth posting about:

1. Only “investors” in collectibles may take a capital loss on the sale of a card (if sell for a loss). All you avowed collectors, who expressly state your collections are for enjoyment and personal use only, have publicly announced to the IRS that you are not entitled to a tax loss on the sale of a card. Just hope things keep going up! Or, like some of us, admit that you buy cards for investment, and you have strong proof of intent and thus entitled to take losses. You must recognize gains (at 28%) regardless of whether you own cards for investment or as a hobby. But only investors, and not collectors, can take losses.

2. Those who are in the business of buying and selling cards do not get 28% gains treatment, but instead have ordinary gains and losses from business operations. For many, ordinary tax rates are higher than 28%. This begs the question: are those who obtain retail sales certificates (to avoid paying state taxes), effectively declaring they are in the trade or business of selling cards and thus subjecting themselves to ordinary gain, rather than 28%?

Assuming the answer to the 2nd question is “yes”, seems the best tax move currently for individuals (not dealers) is to post on message boards that you invest in cardboard and don’t get a resale certificate to avoid state taxes.

Hey Ryan,

If you go back through my numerous tax related posts, you'll find I've mentioned exactly what you're saying in your point #1 several times about how only investors get to deduct capital losses from card sales, and not collectors. And you are absolutely right about not posting about being a collector on a public forum like this if you ever hope to be able to deduct a loss from a card sale as an investor. Same goes for posting pictures of your man caves on here, and the stuff you have displayed. I've also posted numerous times now that the easiest way to tell an investor from a collector is that a collector displays his cards on the walls or shelves in their office or man cave, while an investor keeps their cards in a vault or safe deposit box.

And just to be very clear, 28% is the max long term capital gains federal tax rate on the sale of cards, whether you are a card investor or collector. You do not just pay a flat 28% long term cap gain tax on net profits from card sales. It depends on a lot of other factors, like if you have any other capital losses to offset against gains from card sales, what taxable income you have, your filing status, what tax bracket you end up in, and so on. And also, that 28% max rate only applies for "long term" net capital gains from card investment/collectible sales. That means you had to have owned a card for at least one year, or more, for it to be a long term capital gain (or loss). A net "short term" capital gain from the sale of a collectible/investment card owned less than twelve months is treated and taxed as ordinary taxable income, just like W-2 wages, and is subject to federal income tax up to the current max individual rate of 37%.

And as to your point #2, I've also numerous times posted how dealers do not get the max 28% LT cap gains fed tax rate on net profits from their business' card sales. It is ordinary taxable income, subject to a max federal individual income tax rate currently at 37%, but that is only if the business net income ends up getting taxed on a person's individual income tax return. If you set up your business and have it taxed as a C-Corporation, the corporate entity actually pays the tax at a flat federal tax rate of 21% on every dollar of net business income. Also, in the case of net business profit that does end up on your personal income tax return, please be aware that in some cases that net business income may also be subject to additional self-employment taxes (social security and Medicare) of upwards of an additional 15.3% tax on your net business income, on top of the up to 37% federal income tax you may owe on it already. And I'm not going to even get started on the potential impact of Obamacare taxes on excess earnings and net invest income.

But you are absolutely right that someone wanting to be treated as a collector or investor for income tax purposes someday, at a max fed LT cap gains rate of 28%, should not go out and be getting a resale exemption certificate so they don't have to pay state sales tax. Especially if cards they are now selling and want to treat as collectible/investment sales, and not business sales, were purchased using that sales tax exemption certificate. Cards purchased using a resale sales exemption are supposed to going into a business inventory, not someone's collection or investment portfolio.

And unfortunately, for a lot of people who are suddenly going to start getting these 1099-K forms next year for cards/items they're selling, the initial thinking by the tax authorities is likely to be that you're a dealer in business selling cards/items, not a collector or investor. So as I've suggested numerous times now, it may behoove a lot of these soon to be affected people to talk with a qualified tax professional, especially one knowledgeable of the state they're in, to discuss and plan what might be the best way to plan for and handle this for tax purposes going forward.

So Ryan, how deep did you dig? Once you jump in, it's almost like a bottomless pit with all the tax related rules, options, and so on, isn't it? LOL Welcome to my world, and be glad we're not talking about state, local, or any other oddball taxes, as well!

Anyway, I still can't believe you hadn't already picked up both points from many of my numerous earlier tax related posts. I figure you either just lucked out and missed reading them, or I put you to sleep with all the technical crap I had crammed in them before you got to the parts where I covered the points you're now bringing up. LOL

As I've said numerous times now, for tax purposes in regards to our hobby, you can end up being treated as a Dealer in business, an Investor, or as a Collector/Hobbyist. And I feel you can be more than one, or even all three of them, at the same time, as long as you keep adequate records and your business inventory, investment portfolio, and card/item collection separate and properly documented.

Have a good one!

[Exhibitman]

You can be both a collector and in the business of buying and selling cards.

New Shimmer. It's a dessert topping and a floor wax!


Sorry, where was I before the commercial? Ahh, yes. You can be more than one thing, like a homeowner and a commercial real estate owner. It all comes down to record keeping and conducting your business in a businesslike manner. You have the resale permit and track your sales, you are 90% of the way to legitimacy. File a Schedule C every year to report your profits and losses in the business and show a profit 3 of 5 years and you are golden. No way the IRS calls your reported activity a hobby with all that evidence. The folks I fear for are the tax scofflaws. Give Caesar nothing and you get caught you are going somewhere there are no cards.

[Smarti5051]

Not to hijack the thread, but I do have a cost of goods/basis question regarding the sale of cards. Let's say you buy a 1915 Cracker Jack set for $100,000 at auction. Five years later, the set is worth $200,000. At that time, you list and sell the Ty Cobb card from the set for $50,000. You retain the remainder of the set. How do you determine the cost basis (or cost of goods sold) for purposes of determining taxable gain?

[Rhotchkiss]

I appreciate that Bob. I have read all of your other posts, and I guess I already knew that, but it just sort of re-hit me last night as I started looking for proposed regs from the 1990s. BTW- I am recovering tax attny with a masters in tax law from Georgetown, who practiced for 7 years before giving up that racket. I worked on corporate and partnership deals, and never had occasion to learn about collectibles tax or really deal much with individual taxes. To that end, I - as most here- really appreciate your advice and posts!

Regarding the 1915 CJ question: you would have to go back to the date you bought the set and establish the approximate value of the Cobb as of that date, which should be pretty easy to do with VCP or just google. Take that value and subtract it from your current sales price and that’s your gain. Do your best, don’t be a pig, and document your methodology, and you should be fine.

[BobC]

Originally Posted by Rhotchkiss

I appreciate that Bob. I have read all of your other posts, and I guess I already knew that, but it just sort of re-hit me last night as I started looking for proposed regs from the 1990s. BTW- I am recovering tax attny with a masters in tax law from Georgetown, who practiced for 7 years before giving up that racket. I worked on corporate and partnership deals, and never had occasion to learn about collectibles tax or really deal much with individual taxes. To that end, I - as most here- really appreciate your advice and posts!

Regarding the 1915 CJ question: you would have to go back to the date you bought the set and establish the approximate value of the Cobb as of that date, which should be pretty easy to do with VCP or just google. Take that value and subtract it from your current sales price and that’s your gain. Do your best, don’t be a pig, and document your methodology, and you should be fine.

Ugh! I feel your pain, but try doing it for like 45 years, and include individual, corporate, and all business taxes, estates, trusts, tax planning and consultations, audits, reviews, compilations, not to mention specialized services like SOC/SAS-70 reporting, and still finding time every now and then to butt heads and square off against the IRS and other tax authorities. And that's just off the top of my head! I just have a lowly undergrad degree, but did start out in the old "Big Eight" with Peat, Marwick, Mitchell (KPMG today) and really learned my craft the old school way, on the job. And even had a 15 year stint in private industry as a CFO/Controller for a real estate developer/manager where I was responsible for not just a real estate management firm, but also dozens of commercial real estate entities, two different construction companies, our own in-house architectural firm, in-house real estate broker, and so on. Can definitely swap some war stories. LOL

And I hope you don't mind, but in Post #41 I expanded a little bit on your response to Smarti5051 in your second paragraph above. LOL

Take care!

[Smarti5051]

Also Rhotchkiss, thanks for your post as well. I made the mistake of clicking on your Flickr link a couple weeks ago and felt an acute envy, as many of the cards in your collection are at the top of my wantlist.

[BobC]

Originally Posted by Smarti5051

Not to hijack the thread, but I do have a cost of goods/basis question regarding the sale of cards. Let's say you buy a 1915 Cracker Jack set for $100,000 at auction. Five years later, the set is worth $200,000. At that time, you list and sell the Ty Cobb card from the set for $50,000. You retain the remainder of the set. How do you determine the cost basis (or cost of goods sold) for purposes of determining taxable gain?

That is an absolutely great question, but unfortunately, one with no specific, 100% correct, black and white answer. There are various ways you could go about doing this, but it will most likely come down to making some kind of reasonable guesstimate. And you'll also want to be sure to keep good notes and records so you can properly report future transactions involving other cards from the set in an accurate and consistent manner as well. So after having said all that, here are some options I'd suggest.

1. This is the best option of all, but can only be done if you do this when you first buy the set. You sit down with the seller and you list out and assign an agreed upon value for each card in the set that adds up to the $100K you're paying for it. Or you can go and assign an agreed upon value for all the star/HOFer/rare cards in the set, and leave the residual value up to the $100K being paid to be evenly divided among all the common or other cards not separately listed and valued. As long as you and the seller are not related, the IRS can't really argue whatever you two decide to value each card in the set at. This will likely help the seller also, as he should be reporting the sale for tax purposes as well. And if he acquired the set card by card originally, each card, not the set as a whole, is going to have its own tax basis that he's likely going to need to report on his own return. And remember, if he's selling the set as a Collector, any cards in it that he sells for a loss would not be tax deductible by him. So if he way overpaid for the Cobb in the set, as part of your deal the two of you could agree on a higher value for the Cobb, so the seller doesn't get stuck with a non-deductible tax loss. I would also suggest maybe having two copies of the list of agreed upon card values made up so both of you could sign each list, and then each keep a dual signed copy for your tax records. Of course, this only works if the seller agrees to it, and I can easily think of at least one reason they may not want to.

2. However, if you had bought the set already, but had no card value deal or list with the seller, you could go and hire someone qualified to act as an appraiser of the set, and give you the current appraised values of each card in the set. You would then do some math to determine what percentage each card's appraised value was to the appraised value of all the cards in total. And then just multiply that card's percentage by the $100K you paid for the whole set, and voila, you use that result as the card's tax basis for tax reporting purposes. (For example, appraiser says a card is currently worth $40K, and the appraised value of all the individual cards in the set total up to $200K. So $40K / $200K = 20% X $100K = $20K as the tax basis of that particular card.) This method would be particularly relevant for a set that had many different grades/conditions of cards in it that caused their values to fluctuate greatly. However the time, effort, or cost for you or a hired appraiser to do all this might prove too prohibitive. If you do this, be sure to keep all your notes, records, appraisal, and consistently follow the same methodology in determining the tax basis of every other card in the set.

3. This may be the most reasonable, and doable, option of all. Go back to when you first bought the set, and then go find a published checklist with estimated card values, for that set, from as close to when you originally bought it as possible. Use those published card values to then do a similar calculation, as shown in Option#2 above, to come up with your card's tax basis. If the checklist shows an overall value for the entire set, along with the values for individual cards, ignore the listed overall set value. Instead, add up the listed values of all the individual cards and use that as the total set value that is the denominator in the formula shown in Option #2. If you originally acquired the set from years ago when they were still publishing the SCD catalogs, those would be the perfect kind of check/value lists to use for this exercise. They typically listed a value for every card in the set, at least for the vintage sets, and they showed values by card for various conditions as well, usually NM, EX, and VG. In this case, I'd even go a step further and look at the overall average condition of the cards in the set, and specifically use the listed card values for the condition closest to what the cards in the set actually were, for this tax basis calculation. This methodology makes even more sense the more consistent the condition is among all the cards in the set. Though by no means perfect, this method at least gives you a logical way to figure each card's tax basis. And as with the other Options, if you choose to use this one, remember to keep all your notes, records, and calculations, and be sure to consistently apply the same calculations and methodology when determining the tax basis in all the other cards from this set as well.


Some overall comments. Don't forget that when determining the original cost basis, you may need to add in some other costs besides just the original purchase price, as well, like maybe shipping to have cards delivered to you. If so, for something like shipping costs, just spread that kind of cost equally across all the cards in the set, and add it onto the tax basis for each card you previously calculated using that formula shown in Option#2. In some cases, after acquiring a set you may have some of the cards graded, re-holdered, whatever. If so, those grading fees and costs (postage, etc.) also become part of the tax basis of those specific cards going forward. Assuming you kept records of which cards you had work done on, and the costs involved, simply add those costs onto the previously calculated tax basis for each relevant card. But if you didn't keep details of the specific cards involved, as long as I could show a cost was incurred, I'd go ahead and at least spread the cost across all the cards in the set. And what if you ever upgraded a card in the set after the original purchase? Hopefully you kept details/costs of the upgrade acquired. In which case you would remove the card you're replacing, and its previously calculated tax basis, and swap it out for the replacement card and its tax basis as a part of the overall set's tax basis now. This isn't anyway near all the potential issues, but should cover a good chunk and the most common of them. Good luck!

[BobC]

Originally Posted by Exhibitman

You can be both a collector and in the business of buying and selling cards.

New Shimmer. It's a dessert topping and a floor wax!


Sorry, where was I before the commercial? Ahh, yes. You can be more than one thing, like a homeowner and a commercial real estate owner. It all comes down to record keeping and conducting your business in a businesslike manner. You have the resale permit and track your sales, you are 90% of the way to legitimacy. File a Schedule C every year to report your profits and losses in the business and show a profit 3 of 5 years and you are golden. No way the IRS calls your reported activity a hobby with all that evidence. The folks I fear for are the tax scofflaws. Give Caesar nothing and you get caught you are going somewhere there are no cards.

Adam, that is hilarious. The stuff you come up with and post sometimes is priceless!

On a different note, and for the benefit of our viewing audience, just wanted to expand slightly on what Adam was saying about reporting your card/collectible business for tax purposes. First off, everything he's saying is true, and good advice to follow. Record keeping for a business is a must, and you want to keep things separate as much as possible. Get a separate bank account just for the business. Try not to run any activity or transactions for your personal collection or items you want to hold as investments through the business. If ever questioned, it makes it easier to demonstrate and support your claim that different portions of the cards/items you have are for your collection, held as investments, or part of your business inventory.

Now this doesn't mean that you can't take something from your personal collection or cards/items held as investments and decide to transfer them to your business for sale as inventory, or vice versa. But the more frequently you do that kind of stuff, especially if you aren't keeping really good records of what is being transferred between the different groups, the harder it will be to convince an IRS agent you can and are operating as a Dealer, Investor, and/or Collector, all at the same time.

Adam also mentioned filing a federal Schedule C for your card business with your individual federal income tax return (Form 1040) each year, and to try and make sure you show a profit at least 3 out of every 5 consecutive tax years. Schedule C is titled "Profit or Loss From Business", and is the tax form individuals include with their Form 1040 return to report their business income and expenses, and resulting net taxable business income, or loss, each year. But just because you operate a card business as a Dealer, it doesn't necessarily mean you'll report the activity on a Schedule C form as part of your personal tax return. It depends on how you set up the business, and if you operate it as a sole proprietor, or if you incorporate the business, form a partnership to run it, or set it up as a limited liability company or entity. I'm not even going to try and get into all the different options and nuances. Suffice it to say that someone involved as a Dealer in a card business isn't always going to be reporting the activity from that only on a Schedule C form.

The advice by Adam to try and show you had a profit from your card business at least 3 out of every 5 years is spot on, and relates to what is commonly known as the "Hobby Loss Rule". This rule gives the IRS and it's agents the ability to review your tax returns, and if they find you had a questionable business that just kept losing money and creating tax losses year after year, they can invoke this rule and declare your so-called business is really a hobby, and therefore none of the losses generated by it are allowed as tax deductions anymore. It is not something that is automatically triggered by the IRS computers, but if they do notice the pattern and investigate (ie: audit), an IRS agent can invoke the rule and negate your loss deductions, even if you are 100% trying to operate as a valid, for-profit business.

Clarifications over, carry on.

[Exhibitman]

Originally Posted by BobC

Adam, that is hilarious. The stuff you come up with and post sometimes is priceless!

Well, I've been doing stand-up for 10+ years now, so whenever I see a chance..."the world is a stage".

[Wite3]

Horrible idea...especially if it is based in CA...ebay will charge you (of course) for the vault and I guarantee they will add things like insurance on top of that. I am fairly certain they will not let you self-insure (via something like Collectible Ins. Co.). Fire danger in CA, theft, earthquake, etc.

Not seeing the card in person is also weird to me, an old-school collector not an investor, but even as an investor, I want to hold it and see it.

What will it cost you to actually remove a card from the vault? A handling fee to find it and a shipping fee? More?

Ugh...hate where the "hobby" is going sometimes.

[SyrNy1960]

Originally Posted by Wite3

Horrible idea...especially if it is based in CA...ebay will charge you (of course) for the vault and I guarantee they will add things like insurance on top of that. I am fairly certain they will not let you self-insure (via something like Collectible Ins. Co.). Fire danger in CA, theft, earthquake, etc.

Not seeing the card in person is also weird to me, an old-school collector not an investor, but even as an investor, I want to hold it and see it.

What will it cost you to actually remove a card from the vault? A handling fee to find it and a shipping fee? More?

Ugh...hate where the "hobby" is going sometimes.

What about cards getting lost, damaged, or stolen in the vault, swapped out, etc. How many times have you received a card, even slabbed, that had issues. Not receiving the card, you will have to trust them. I’m also an old-school collector, and getting older, so maybe I just don’t trust change.

[BobC]

Originally Posted by Exhibitman

Well, I've been doing stand-up for 10+ years now, so whenever I see a chance..."the world is a stage".

Ha! You forgot to add, "And I'll be here through the weekend!"

[Smarti5051]

BobC. Thanks for the very thorough analysis. I should note that my question was a hypothetical, as sadly I do not have a Cracker Jack set. I very much WANT that set, but I do not presently own it. If I had it, I am pretty sure I would die with it (or at least the HOFers in the set), so my heirs would get the stepped up basis. LOL I was just curious how that would work (and similarly how it might work when a collector or dealer acquires a collection). I can honestly say my LEAST enjoyable part of running my business is pulling all of the numbers together for taxes. I have to imagine it is a bit of a nightmare for a card broker that does things by the book.