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

[BobC]

Originally Posted by ullmandds

I met with my new accountant today…my old one of almost 20 years retired. Mike is likely mid/late 30’s if I were to guess.

The topic of taxes for the sale of collectibles, art, etc came up…I guess I brought it up. And it certainly seems to me that there are a lot of gray areas in tax “law?”

I brought up the concept of “collector” vs “investor” as a way to possible get a break on losses terming myself an investor. We discusses length of ownership…rationale for the initial purchase.

Mike gave me an example of a guy with a muscle car purchased new for 3-4K in 1970 or so. The car was purchased as a car…as transportation…not as an investment. It just turned out the car turned out to be aq helluva investment…recently sold for 80K…NO TAXES WERE PAID.

A family heirloom…handed down generation to generation…never intended to be sold…but eventually sold I’d assume NO TAXES WERE PAID as when someone inherits something the value on the day of the inheritance is the cost basis?

An older gentleman who bought packs of bb cards in the 40’s-50’s…like 
Ted Z!!!!! A time when these cards had no value and could not possibly have been purchased as an “investment”…just a fun hobby that turned out to be a good investment. This to me is one of the grey areas? Are these taxable?

For sure the Plank card that Ted bought in later years would be taxable as at this point in time this card had significant value?

I hope Ted doesn’t mind me using his name here!!!!!

Or someone like me…been collecting cards since the mid 70’s. We did not consult price guides after opening packs to see how much money we had made…or lost. But this did start happening in the following 10 years.

Someone like me will be paying taxes on all of my card sales because in my lifetime…bb cards have had value…therefore whether I am/was/is a collector vs investor…I’m paying!!!!! It’s the differentiation between collector vs investor which still irks me. It seems the IRS is judging me based on assumptions?

So nothing revolutionary…I thought the car story was interesting.

Turns out Mike is a collector too…still has his childhood collection…is a big jersey collector.

I like Mike!

Yes Pete, there are a lot of "grey' areas in tax law, just like regular law. The Internal Revenue Code is quite large, but the IRS/Treasury Regulations that are published to further explain the various tax laws are much larger, and detailed, subject to change over time after appeals, court rulings, and such.

The Collector vs. Investor vs. Dealer conundrum I've mentioned on here multiple times is often as clear as mud, and why I generally always recommend people contact a qualified tax professional if they have questions and issues. Sounds like you got a good one!

Next time you talk to him, try running by the very simplistic way I've often described as a base difference between a supposed Investor vs. a Collector. A Collector has his collection hanging on his wall or sitting on a shelf in his man cave. An Investor has his investments sitting in a bank safe deposit vault or in a new vault like at Goldin or PWCC. Curious as to what he thinks of my over simplified example, and if it gets a laugh out of him.

The argument about whether one is an Investor as opposed to just a Collector is still somewhat more recently confusing as the idea of cards being investments has been growing and getting more and more publicity in the media and the public, to the point where even the IRS can't completely ignore such a transformation and taxpayer position. You should also ask your new tax guy how he feels about the possibility that a person can be all three, Collector, Investor, and Dealer, all at the same time, as long as records are kept and maintained that keep and treat various parts of his collection/investments/inventory separate from each other. The trick then, if ever questioned by the IRS, is to be able to show and convince an IRS agent that you are any/all of these different categories. And for that there is no real, simple, defined line that definitively says you are or aren't one of them.

I am curious as to the example you mentioned regarding the 70's muscle car though. Are you saying the original person buying it for $3-$4K held it all these years, and then sold it for $80K and paid no taxes, or that they left it to their heirs, who were able to get a stepped-up tax basis in the car so when the heirs sold it they ended up paying no taxes? It wasn't really clear from your description as to exactly what occurred. If it is the same person that originally bought the car, and then many years later sold it for $80K, I'm pretty sure they should be paying tax on the income from that sale, most likely as a long-term capital gain. If it was inherited and subject to a stepped-up basis, that has nothing to do with whether the car was considered a collectible or an investment. And if it was sold by the same person that originally bought it, it doesn't really matter if it was an investment or collectible either because it was apparently sold for a profit. The one big tax difference between a collectible and an investment is that if you sell an investment for a loss, you can offset that loss against other capital gains, and potentially other ordinary taxable income as well. If you sell a collectible for a loss, you can't deduct the loss against anything, it is considered a hobby loss and is totally not deductible.

The other big tax difference between collectibles and investments is the potential federal tax rate that can be charged on the capital gains from their sales. This only applies to sales that are long term, where the items being sold are held for twelve months (one year) or longer. Short term sales of collectibles and investments held less than one year, if sold for a profit, all result in ordinary federal taxable income (like salary and wages) and are subject to the top individual federal tax rate currently at 37%. Long term gains are treated as capital gains and are subject to a maximum federal tax rate of 20% for investments (stocks and bonds), but 28% for collectibles. I am currently unaware of anyone trying to sell a baseball card as an investment, and successfully claiming it is an investment subject to the max federal capital gains tax rate of 20%, if challenged by the IRS. But given the change in the markets and perception by the media and public, it is virtually impossible for the IRS to continue ignoring this new treatment/classification for baseball (and other sports) cards. Interestingly, in the rules and regulations the IRS has defining "collectibles" they specifically mention several things they deem as collectibles, but sports cards are not one of them. This is one of those "grey" areas/lines people refer to. At some point in the future, I can see one of these "modern" investors selling one of their million-dollar plus cards, and end up going to appeals/court to argue that it is an investment, and therefore only subject to a 20% max capital gains rate. It is at that point that we may get some better clarity as to what can/will be considered as an investment versus a collectible, and what level of proof will be required to demonstrate that. Until then, it is still arguable by a taxpayer, and therefore not truly illegal tax evasion on their part by claiming it. But you have to make the claim on your tax return first, and the IRS has to actually choose to look at your return to make it an issue where you may have to prove your position.