Tax rules for hobbies
Steven,
Advice from a tax professional (me): Keep good records. If you receive a 1099 showing gross sales, and you claim a smaller amount of income, then you might easily get a letter of inquiry. No need to panic; just produce your documentation. We deal with them all the time, and usually a return letter with photocopies of records is all that's required to settle the issue. The IRS typically runs 13-16 months behind on matters like this, so when you file your 2013 taxes next spring, any letter you get would typically show up in the summer of 2015. (Some letters go out within days of filing, but seldom for cases like this.)
What follows applies to all hobby income, whether it shows up on a 1099 or not (or even if you're selling off your collection).
If you're using the flips to fund your other purchases, then it's clearly a hobby. Steve B is correct: you can't take a loss on a hobby. If you've escalated it into a sideline business, then you need to be able to show clear intent to make a profit (even if you don't make one in some years). No need for a schedule C as long as it's a hobby. If you do decide to go the business route, you can still do it under your own SSN. That's what the Sched C is for. If you have a separate tax ID number, then you're getting into other forms. (Though my wife and I had a C corp for about 10 years, and the recordkeeping wasn't all that bad.)
The income (that's net receipts [gross receipts minus PP or CC charges, eBay or auction house fees, and returns] minus cost of goods sold) shows up on line 21 of your 1040 as "Other income."
Your expenses show up on Schedule A as Miscellaneous deductions. That's things like postage, grading fees, etc. The catches are that 1) you have to itemize deductions to begin with in order to get any benefit; and 2) your bundle of Misc deductions (hobby expenses, investment costs, etc) is subject to a 2% floor. So if your adjusted gross income is $100,000, the first $2,000 in total Misc expenses doesn't count.
Here's a simplfied example:
You buy cards for $17,500 and sell them for $23,500. You incur other hobby-related expenses of $2,500 along the way (for grading, shipping, storage, show entry). According to the IRS, you had income of $6,000 from your hobby.
Add that $6,000 of hobby income to your wages of $69,000 for a total adjusted gross income of $75,000.
On Schedule A, your hobby expenses of $2,500 go on line 23. Then using lines 25 and 26 you'll subtract the 2% of your AGI (in this case $1,500) for a net "Misc deduction" of $1,000. Many people have other Misc deductions--tax prep fees, safety deposit box rental, a few job expenses--but those often don't come up to the 2% floor. In your case, you're covering the floor with your hobby expenses, so you would get a tax benefit out of all the other stuff too.
That's the short answer. There are lots of complicating factors I won't go into here: taking travel expenses; breaking up lots; choice of hobby vs. business; and on and on. You'd want to talk to your tax preparer about these. And I would recommend using a tax pro for at least the first year--programs such TurboTax are great if you already know what you're doing, but they won't walk you through a decision tree the way a pro will.
Feel free to PM me if you want to go into anything a little deeper.
Bill
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