Are baseball card transactions taxable?

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Posted By: Eric Brehm

I have heard differing views on whether income tax has to be paid on the profit realized when selling a baseball card, and if so, how this income is treated for tax purposes. Does anybody have a definitive answer on this? (I am asking here specifically about income tax -- not estate tax, inheritance tax, gift tax, or state sales tax.)

My assumption would be that baseball cards are in fact considered capital assets, and thus if I sell one for a profit, I have to report that profit as a capital gain. Similarly, if I sell a baseball card for a loss, I can deduct this as a capital loss (or use it to offset gains on other transactions). I would assume that baseball cards are not considered "personal use" property, where a loss can only be deducted in the event of casualty or theft.

Given that baseball card profits are subject to taxation, another question is whether the IRS considers baseball cards to be "collectibles." This is important because collectibles are subject to a 28% tax rate on capital gains, rather than the usual 15% rate that applies to gains on other assets such as stocks. The tax code (section 408(m)) defines "collectible" as follows:

(2) Collectible defined
For purposes of this subsection, the term “collectible” means—
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by the Secretary for purposes of this subsection.

Baseball cards are not specifically mentioned, but would they fall under the catch-all definition in paragraph 2F? How do I find out what the Secretary has specified?

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Posted By: barrysloate

If you make a profit on the sale of anything, you are liable to pay taxes. If it is your hobby and not your main source of income, I believe it is taxed differently. I would be careful about taking a tax write-off on a loss however, as it could raise a red flag.

If you sell one baseball card during the year and make a $50 profit, nobody will know about it. If you sell your collection or a major portion of it and accept a large check, I would speak to your accountant about it.

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Posted By: leon

As Barry said it's income. I treated it as such a few years ago, actually it was a loss of a few thousand dollars, went through an IRS audit, and it was fine...I showed where I bought the cards on ebay, and sold them on ebay for a loss......I did forget about a few stocks I sold and had to pay the piper...but the card part was fine.....The IRS recognized and accepted the loss.

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Posted By: warshawlaw

or in most tax law, the regulations. You'd need to look at code of federal regs to find out how the catch-all has been applied.

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Posted By: Max Weder

Leon:

In answering the question, you forgot to include the following disclaimer, which all tax lawyers put on their correspondence:



IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.


Max
(who avoids giving any US tax advice, despite putting the above disclaimer on my work emails, and sticks to the Canadian Income Tax Act)

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Posted By: dan mckee

I file a schedule C every year and have done so since 1999 for sales on ebay. If you pay Uncle, he usually leaves you alone. If you don't pay Uncle anything as that survivor idiot, then you go to jail.

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Posted By: Rhys

The bottom line is that it is all taxable if there is profit involved, the key is to figure out the best tax treatment of the sale. A flat sale of a collectible is taxed at a fairly high rate. If you do what Dan does (and I do) and file a Schedule C than you get to take a lot of deductions to offset the profits like gas money to shows, hotels at shows, admission costs, internet fees, ebay fees, paypal fees, etc. My only caveat would be to NOT take the business use of the home deduction. I specialized in Tax Law during Law School and worked for a short period for the IRS in Chicago. The one piece of advice I got over and over again is that Business use of the Home is the number one red flag for an audit. Even though I could get a big deduction for it, I have never filed it and I have never been audited. Not that there is anything wrong with taking it honestly but it is so abused that the IRS has really honed in on that one and it is not worth the trouble of an audit in most cases.

I am not in any way giving tax advice in a legal capacity, but the bottom line is that it IS taxable and you should figure out the best way for your personal situation to take care of it honestly and painlessly before the IRS could ever get involved and make it ugly and painful.

Rhys Yeakley

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Posted By: Bob

Other collectors used to get a big laugh out of the fact I filed a Schedule C each year and paid capital gains on baseball card sales (and other items) profits on ebay, until I showed them an article last year that said the IRS was really going to crack down on ebay sellers who didn't do so. Now there is no more laughing

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Posted By: cmoking

I don't have any answers, but I do have a CPA. I give him a sum total of all cards I sold in the year plus the cost basis for those cards. He uses those numbers and plugs them in. I do have specific details for each card with receipts (although it would be a major pain in the ass to get it all out in case of an audit...yikes). I was audited last year for other reasons. Even when they went through my filing, and started to ask questions about things other than their initial reasons for auditing, they did not inquire about the collectibles profit that I reported.

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Posted By: Jim Manos

I claim mine as of course short term capital gains/loss. Although, I have enough loss carry forwards from some other ventures that I can sell baseball cards till I am blue in the face. Hope this helps.
Capital gains on a investment(baseball cards) is 1 yr or less, long term is over a yr. Capital gain's taxes are not going to get any better fellows. Especially if one of the D's get in...

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Posted By: Frank Wakefield

I think selling a card does not create capital gain.

I think it is ordinary income when you sell. And you owe a use tax when you buy.

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Posted By: barrysloate

Frank- how about if you sell a card that was in your collection for ten years. Isn't that considered a capital gain?

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Posted By: Frank Wakefield

I put "think" up there because I'm not certain. But I've talked with accountants who were uncomfortable with the capital gains stuff.

I think the way you can do the capital gains thing is if you aren't a collector, but are a dealer. You track inventory; acquisition date and cost; business costs of storage, advertising, transportation, and the like; as well as your sale dates and amounts. I think that's the only way you do any good trying to deduct milage, plane tickets, hotel room, convention fees, and the like.

The IRS does not view a baseball card in the same light in which they view stocks, bonds, or mutual funds. Baseball cards aren't investments.


It makes sense to me that if I'd bought a Mark McGuire rookie card in 1994 for $5, and I sold it in 1998 for $50, that should be a $45 gain in my mind. My understanding is that the IRS doesn't have that opinion.

Frank.

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Posted By: barrysloate

Baseball cards are a funny kind of commodity. I remember applying for my first mortgage around 1990. I told the bank in my naivete that I didn't have much money in savings, but that I had a baseball card collection worth six figures. They weren't amused!

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Posted By: leon

I am in no way positive but I think the amount of time you own something will make it a short, or long, term gain....which is taxed at a different rate. I thought a long term had to be 18 mos. though....Are there any CPA's here that would want to at least say what the law is, without giving advice?

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Posted By: Hal Lewis

Think the IRS will go after the guy who just sold his T206 Wagner for a profit of more than $1 million?

Unfortunately... they will probably use this as a "test case" to come down hard on him and set an example.

Hopefully he has a good tax lawyer who can win the battle and get the profit declared as "Long Term Capital Gains."

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Posted By: cmoking

If stamps and coins are designated as collectibles (per the original poster) ... then I don't see why sportscards aren't.

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Posted By: Matt

I am a CPA and I will try and clear up a few items. There is a lot of information flying around, some accurate, some inaccurate, some flat out wrong and some needs further explanation. As with most tax law, the rules are muddled, and this issue isn’t clear cut as some grey areas exist. Hopefully this doesn’t make it more confusing.

Also, these are my interpretations and should not be used without first consulting your paid tax advisor.

First baseball cards are considered collectibles(as are stamps, coins, gems and art) in the hand of individuals and inventory in the hands of a business. How the sales of baseball cards are taxed depends on how the cards were held.

There are three ways to hold collectibles:

1)As inventory held for the sale to customers in the ordinary course of a trade or business. Gains from these sales are ordinary income (not capital income and taxed at regular tax rate), losses are ordinary losses (sales are gross receipts and what you paid for them would be your cost of goods sold). This would be your dealer/ baseball card shop owner. You would typical see these sales on a Schedule C or through an entity (partnership, LLC, S-Corp, C-Corp). As stated above all the expenses related to these businesses would be deductible expenses (fees, show costs, postage, travel, etc.)

However, any schedule C filer must be careful of the Hobby-Loss rules. If this is your full time job(dealer/card shop owner), these rules won’t apply, but if you have another full time job you must show a “profit motive”. Profit motive usually means net income 3 out of the last 5 years. If you are taking losses every year the IRS can call this a hobby. Under the hobby loss rules, you pay taxes on net income in years when you have net income and in years when you have a net loss, expenses are limited to income – no over all loss is allowed. It comes down to profit. If you show a net profit the IRS will allow expenses against income. If you have more expenses than income, the IRS will claim it is a hobby (no profit motive, but pleasure motive) and only allow expenses to the extent of income. How much time is spent and the pleasure factor are typical factors the IRS will look at when applying the hobby loss rules. It is commonly applied to horse owners (breeders and racing) and the weekend car racers.


2)As an investment. Long Term (held more than 1 year) gains are taxed at 28% (not the 15% applied to non-collectibles). Short term gains (held less than 1 year) are taxed at your ordinary income tax rates. Losses would be a capital loss, which can be used first to the extent of capital gains and then limited to $3,000. Gains and losses are shown on Schedule D. Investors with a lot of sales have to be careful of turning into dealers and hence losing the capital gain benefit. There is no bright line test to prove one is an investor vs. dealer (and hence falling under category one above). It is a case by case basis and the IRS will look at frequency of transactions, purpose of acquisition, duration of ownership, among other factors.



3)As a personal use asset. Long term gains taxed at 28%. Losses are not allowed. Prime examples of this occur with cars, furniture and homes (although there is a large gain exclusion for primary personal residence and these assets are not collectibles so gains are 15%.) This would be cards purchased for a personal collection.


Of course the last option is the worst outcome. Taxed on income and disallowed on losses (the IRS code is full of rules that have this whipsaw effect). So the question is what is the difference between an asset held for investment and one held for personal use? Like many items of our tax law this is usually determined on a case by case basis. There is a lot of case law as this scenario is analogous to investors vs. traders of stocks. It comes down to intent. How did you intend to hold the item? How long did you intend to hold it (long term appreciation vs. short term swings in market)? Why did you buy the item?

Can your intent change? Yes. Intent when you purchase something can change down the line when the item is being sold. I believe you can buy something initially for personal reasons and later change it to investment asset and vice versa. It comes down to intent at time of sale. The problem with this is proof. How do your prove intent to the IRS. The best way to prove this in case of an audit is contemporaneous records. A log showing purchases and intent when the asset is purchased as well as when your intent changed would go a long way to proving your intent. Of course intent only comes into play when collectibles are sold at a loss. Gains will be taxed the same no matter if it is investment or personal property.

Why not just claim everything as an investment? I think most of the collectible rules typically deal with art. If you buy art to hang on the wall in your home it is personal use. If you buy it and store it it’s probably an investment asset (who does this?). Doesn’t translate well to baseball cards, but if you buy a card for you collection it should be personal use. If you buy a card for appreciation and to sell it at a later date it’s an investment.

Also, you can be a dealer (example 1) and still hold cards for investment and personally. Each asset stands on its own. You must segregate your assets, which is inventory (owned by business) and which are investments.

Bottom line, as others have stated, yes gains are taxable. Each transaction stands on it own. The most important thing to do is keep records to prove your basis (what you paid for the asset(card)). If you cannot prove basis the IRS will claim the entire sales proceeds as gain (happens with stock quite often).

I typed this out quickly. When I have some more time I will revise and try to make it clearer.

Hope this helps a little and didn’t just confuse you more. Let me know if I can clear anything up or what needs further explanation.

And again these are my interpretations and should not be used without first consulting your paid tax advisor. I am not giving tax advice here.

Matt

Edit to add:
(As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this post, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.)

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Posted By: anthony

i dont tell uncle sam "sh*t" and he gets "sh*t"...other than my job/stocks/interest etc...he gets nothing! if my ssn is attached to it, then he can have a tiny piece, thats all.

i feel that if i am going to claim my gains on baseball cards, i will be claiming my losses on baseball cards, horse races, slot machines, lotto tickets, raffle tickets and anything i can think of.

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Posted By: Bob

As a criminal lawyer I have learned that the last place you want to end up is in a penitentiary of any sort. If you claim your sales and pay taxes on it, even if you underestimated your expenses and the inital cost or value of the cards, the worst thing that can happen is that you end up owing Uncle Sam some money. If you fail to report income, you are rolling the dice that you won't be caught. Failure to report could give you a free pass to the pen. Granted federal pens are luxury suites compared to state prisons, still they are definitely a place to be avoided. As collectors we like to think that we are simply under the radar but you might be surprised. I was startled to see an article listing the top 25 card sellers on ebay and see my ebay handle there! I believe it was in Old Cardboard but I am not positive where I saw it. Makes you think...

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Posted By: Eric Brehm

Matt,

Thanks for all the valuable information, that is very helpful.

Barry,

I had a similar situation when I applied for a mortgage once. The bank was very skeptical when I listed baseball cards as my primary asset, and I had to have my collection formally appraised to prove its value to them.

Eric

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Posted By: Dan Bretta

Don't ask, don't tell! Just kidding....actually I rarely sell any of my baseball cards and memorabilia.