Would you take this deal?

[Mungo Hungo]

I'm not a tax nerd, but I do pay them. I'm having a hard time understanding how you wouldn't be keeping at least a significant portion of the cash you receive.

[raulus]

Originally Posted by Mungo Hungo

I'm not a tax nerd, but I do pay them. I'm having a hard time understanding how you wouldn't be keeping at least a significant portion of the cash you receive.

Well, I’m sure everyone is glad you asked, because calculating taxes is a blast.

Let’s just use some hypothetical numbers here to help frame the math.

Let’s say I bought my piece for $80.

And the piece I’m getting is worth $220. Plus $100 in cash. So my total consideration received is $320. That means my gain is $240. Keep in mind that like kind exchanges (ie trades) are no longer available for collectibles, so I get to pay tax on the full value of what I receive (less my low existing basis), even though I’m rolling most of it over into a new piece.

Based on my collectibles tax rate of 40%, that means I get to pay $96 in taxes.

If you think 40% sounds high, then the math breaks down thusly:

28% federal collectibles capital gains rate
3.8% Obamacare capital gains surcharge (for Leon’s benefit, I promise this is not intended to be political crap)
9% state tax
So actually 40.8%

If you think $320 sounds high for what I’m getting, keep in mind that we’re talking about a 300% increase in value over the last 5 years, from $80 to $320. Given the runup in prices during the pandemic, that might even be low. Furthermore, the cash is pretty easy to value at $100. The only question is how much I’m getting in trade. And I would bet good money that the replacement piece would sell around that price, potentially even higher.

So there’s actually a chance that I might have to pay more in taxes than I get in cash.

I will admit that I do get a new higher basis in the new piece, which will reduce my taxes down the road when I sell the new piece, assuming I ever sell it, which might be decades down the road, or I might just roll it into my estate, in which case the new higher basis is meaningless to my heirs.

Moral of the story (also not intended to be political): paying taxes is no fun. Particularly when it intersects with something intended to be fun like collecting cardboard.