How do you navigate the tax burden of selling expensive cards?

[BobC]

Originally Posted by Smarti5051

I realize I should read the other thread, but I am not sure how "buy more" actually helps reduce tax burden. My understanding is that you pay tax on the difference between net sale price and your basis in a card. So, if you have 5 cards that you bought for $10,000 and sell them this year for $210,000, you would have a net gain of $200,000, which is subject to income tax. If, during this tax year, you bought an additional card for $200,000 (let's say a Ruth Goudey), but you continue to hold it, you can't reduce your gain with the new inventory purchase. I need BobB to check in on this one, but that is my understanding. Otherwise, a company could perpetually increase their assets by buying new cards to offset gains on old ones without ever paying taxes (which is generally frowned upon by the tax man).

I would love to be wrong on this one, so please let me know if this is inaccurate.

Hey Smarti,

It is BobC, not BobB, so you did get that part wrong. LOL. But you're right on the money with pretty much everything else. You treat each item as a separate unit you buy and then sell, and figure your gain or loss on each item accordingly. And as Peter Spaeth said in his post, you can normally only reduce your taxable profits/gains from selling one card/item by selling another card/item at a loss. But even then, that depends on if you're filing as a dealer/business, an investor, or a hobbyist/collector. If you file as a hobbyist/collector, you can't offset losses against other taxable gains/income.

The concept Smarti is sort of alluding to, reducing one's taxable gains/revenue by buying more inventory/assets, falls under a provision/concept known as a Like-Kind Exchange transaction, pursuant to Section 1031 of the Internal Revenue Code (IRC). The concept is that you could defer paying taxes on something you sold for a gain by taking some/all of the profit from that sale, and using it to buy something similar to what you sold. Under current tax law, that is only applicable for buying and selling real estate. Doesn't work with cards.

[Collectorsince62]

I hope to remain in the situation where I never need to liquidate my collection. I would love to pass it on to my children who can do whatever they want with it. My two sons know what I have and also know the options available for selling. I believe their cost basis is the market value at the time of inheritance regardless of my cost basis. Someone please confirm. If they sell at that basis, what is their tax liability? Thanks.

[BobC]

Originally Posted by Collectorsince62

I hope to remain in the situation where I never need to liquidate my collection. I would love to pass it on to my children who can do whatever they want with it. My two sons know what I have and also know the options available for selling. I believe their cost basis is the market value at the time of inheritance regardless of my cost basis. Someone please confirm. If they sell at that basis, what is their tax liability? Thanks.

You're correct, under current inheritance tax law, your sons would get a stepped-up tax basis equal to the FMV of each card/item you leave them on the day you pass. Always keep in mind that this can change in the future.

As for what their tax liability would be, that depends on what they may sell items from your collection for, and what else they are reporting on their respective tax returns in the year(s) of such sales.