Would you take this deal?

[raulus]

Recently received an offer that intrigued me. As others have been posting about some of the moves they’ve been considering, and this one has a bit of a twist, I figured it would merit a broader discussion from the forum.

I’ve been thinking it over, and I figured some of you have probably contemplated similar deals in the past, and might have some observations to share based on your past ruminations.

A few important details:

The deal would involve me trading my current piece for a lower graded piece, and receiving a big chunk of change in exchange for my sacrifice to trade down.

In this case, the item in question is one of the Crown Jewels of my collection. I paid more for it than I’ve paid for any other single piece. And at the moment, it’s arguably the most valuable piece in my collection.

This particular piece is also very rare. For any given player, only a few are known to exist. In addition, this is a well known set that tends to be widely coveted within the hobby, so it’s not some obscure yet rare piece that no one has ever heard of. And my piece is the highest graded piece in the hobby for this player, who also happens to be an inner circle hall of famer. They don’t come to market that often, so they’re difficult to find.

I purchased my piece about 5 years ago, with a plan to keep it in my collection for a long, long time, likely until I decide to sell everything when I retire (still a long ways away).

The potential deal would involve me trading my piece for the same piece that is one grade lower. I would still have the second highest piece in the hobby for this player, which is a nice feature, and means that I don’t have to live with a gaping hole in my collection and in my heart. A close inspection of these two items suggests that they are very similar in quality. Some might even argue that the lower graded piece is as nice as the highest graded piece. And those arguments are not without merit. For purposes of this discussion, let’s assume that I’m familiar with the maxim to “buy the card, not the holder”. So for those whose response will consist of repeating this maxim, I’m hopeful that further repetition won’t be necessary. Although if I’m being honest, I’m a mindless fool when it comes to the registry.

In exchange for my “trading down”, the buyer would compensate me with some cold, hard cash. For purposes of this hypothetical situation, let’s assume that the cash component would represent about 120% of what I originally paid to acquire my piece 5 years ago. Since some of you may salivate excessively contemplating all of this cold hard cash, allow me to tip my cap to my fellow tax nerds: based on my righteous 40% tax rate on collectibles (fed + state), let’s assume that all of the cash I receive in this deal would not stay in my pocket for long, but would instead end up transiting immediately on to the tax man.

Obviously my biggest hesitation is giving up something that I haven’t planned to sell for a long time. Plus realizing that I’m giving up one of my Crown Jewels that is likely one of the best pieces I will ever own, and trading down for a lower graded piece, even if the new piece might not be very different. Plus the fact that I don’t get to really keep the cash seems to make the deal a lot less exciting to me.

What would you do?

[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.

[Schwertfeger1007]

For me it depends on the player/card which you go to great lengths to not mention. Or maybe I'm just curious

Since you are worried about the tax implications, one thought would be to take another card equal to the 120% that has upside and you can hold on to in an effort to defer the taxes until you are retired and can sell while living on a lower income / tax rate.

[raulus]

Originally Posted by Schwertfeger1007

For me it depends on the player/card which you go to great lengths to not mention. Or maybe I'm just curious

Since you are worried about the tax implications, one thought would be to take another card equal to the 120% that has upside and you can hold on to in an effort to defer the taxes until you are retired and can sell while living on a lower income / tax rate.

Getting a second card doesn’t solve the tax problem.

I still get to pay taxes, even on trades.

But with the all trade version, I now have no cash to pay for my taxes.

[BobC]

Nic,

I think you just answered your own question in explaining how the taxes may work to these others posting. If you are possibly going to trade down in condition, and the cash you get is going to go mostly for taxes, all you've accomplished is bumping up your tax basis, while lessening the quality of your collection. Why in the hell would you do that, especially since you aren't planning on selling this item anytime soon.

They only way I would ever think of doing such a deal is if you could keep the slightly lower condition item, AND now have a sizable chunk of money to go out and pick up other things you want for your collection. Based on your possibly not so great tax impact, you already know this answer yourself, and am a bit surprised you even have to ask for everyone else's help. Or was this a trick question for everyone to see who would figure it out. If so, good one. LOL

[Mark17]

I'm not a tax expert and I don't play one on TV, but do you have a monster box of Gregg Jefferies rookies, or some other collectibles you could sell at a big loss, to offset this transaction? Would that work?

[RCMcKenzie]

I am not a tax attorney, but there are many on here who can chime in.

I don't view baseball cards as a commodity on par with gold. "I bought this gold brick of 5 ounces at x price in 2015 and I'm trading now for 8 ounces of gold." in this example, you have a gain.

If you bought an sgc 4 Ty Cobb with an Old Mill back in 2015, and today you trade it for a PSA 2 Ty Cobb with an Old Mill Back, and a Larry Doyle E103 CSG 4 undergraded, then I think you don't realize a gain until you sell, years down the road with your original buy price of your sgc 4 cobb as your basis.

[BobC]

Originally Posted by RCMcKenzie

I am not a tax attorney, but there are many on here who can chime in.

I don't view baseball cards as a commodity on par with gold. "I bought this gold brick of 5 ounces at x price in 2015 and I'm trading now for 8 ounces of gold." in this example, you have a gain.

If you bought an sgc 4 Ty Cobb with an Old Mill back in 2015, and today you trade it for a PSA 2 Ty Cobb with an Old Mill Back, and a Larry Doyle E103 CSG 4 undergraded, then I think you don't realize a gain until you sell, years down the road with your original buy price of your sgc 4 cobb as your basis.

Rob,

You missed Nic's point about how there is no longer any Like-Kind Exchange tax rule in place for collectibles. If Nic just trades his card for someone else's card(s), he doesn't offset the current card values and end up with no tax due. He has to take what he originally bought his card for years ago, which then became his tax basis in that card, and compare it to the current FMV of the card(s) he trades it for. The difference in his card's tax basis, and what the current FMV of the card(s) he traded for, is current taxable gain to Nic. Even if there is no cash involved.

We both know of course that a lot of collectors doing such a private deal will likely not report anything about the trade/sale to the IRS, and thus pay no tax on it. Especially since in a trade, there really isn't any third party required to prepare and file a 1099 for either party to the trade, and then send a copy to the IRS as well. But I've said this before here on the forum, many times prior to Nic, that trades are considered the same as taxable sales of cards for cash by the IRS. And the same goes for any dealers that get involved in a trade as well. It is up to the collectors/dealers to be honest and calculate their gain/income on such a trade, and then report it on their income tax return(s) and pay the resulting taxes due.

[BobC]

I'm not a tax expert and I don't play one on TV, but do you have a monster box of Gregg Jefferies rookies, or some other collectibles you could sell at a big loss, to offset this transaction? Would that work?


Sorry Mark, nice try though. LOL

If you are a collector, selling your collectibles, you cannot deduct any losses from the sale of one against the gains from another.

Now, and I've said this on the forum before as well, if you can prove to the IRS somehow that you were not a collector, and that you actually bought your card(s) strictly as investments, then you can offset the losses against other gains, and potentially against other income as well. And if you could do that, convince the IRS you card(s) were not collectibles and were only investments, your federal long-term capital gains tax rate would be maxed at 20%, not the 28% it is for collectibles.

The problem is that the IRS has historically viewed and defined sports cards pretty much all as just collectibles. It is only most recently that sports cards are starting to look more like a possible type of investment after all. Trick is how to then convince the IRS to agree with that assessment for cards you bought strictly as investments. It will probably take someone willing to go to court with the IRS, and winning their case, for that to happen. And unless we are talking about a T206 Wagner, or some other cards in the six to seven figures, and up, range, I can't see anyone willing to spend the time and money to fight the IRS in court to prove that sports cards can also be investments as well for tax purposes. But I can see someone eventually trying to fight the IRS on this down the road.

[RCMcKenzie]

Thanks for the info, Bob. My accountant has always advised me to never sell, it's too complicated. In your scenario, I have zero interest in trading baseball cards. I thought it would be a tax free exchange, with a deferred tax due.

[jethrod3]

Given all that I've heard, I would keep the card, along with the satisfaction that I owned the best of its kind!! We are our stories, and that, and your offer, is one great story that can be told at numerous cocktail parties!

[Michael B]

After giving Bob a timeout for a double post I have a question that is more about aesthetics.

You state that you are a registry fool. I would guess that PSA's registry actually means something to you. If that is the case, my question would be: How would you feel knowing that the best card in that grade of a set I guess you collect is no longer owned by you and you only own the second best card? Or better yet - What on God's green earth are you thinking????

Why would you give up the best card in your collection for a few dollars if you do not need the money?

I read your post before anyone else answered and these were my first thoughts.

[Mark17]

Originally Posted by BobC

If you are a collector, selling your collectibles, you cannot deduct any losses from the sale of one against the gains from another.

Bob,
Suppose I trade you a green T206 Cobb and a monster box of 1988 Fleer Jefferies. I paid $3,000 for the Cobb and $25,000 for the Jefferies. My total cost basis is $28,000.

I receive from you a lower grade green Cobb, current market value $18,000, plus $10,000 cash. From a tax perspective, isn't that a break-even deal for me?

[JustinD]

Originally Posted by raulus

Getting a second card doesn’t solve the tax problem.

I still get to pay taxes, even on trades.

But with the all trade version, I now have no cash to pay for my taxes.

As a man reporting your gains on a straight trade, while perfectly logical and the right thing to do...you my friend are a saint.

[raulus]

Originally Posted by JustinD

As a man reporting your gains on a straight trade, while perfectly logical and the right thing to do...you my friend are a saint.

Less a saint and more a tax professional who doesn't want to lose my CPA license and thereby kill the golden goose in order to save a bit on my taxes.

[RCMcKenzie]

Have him throw in another card instead of cash, and ask him if it's okay to post a thread about it.

[parkplace33]

Originally Posted by raulus

Recently received an offer that intrigued me. As others have been posting about some of the moves they’ve been considering, and this one has a bit of a twist, I figured it would merit a broader discussion from the forum.

I’ve been thinking it over, and I figured some of you have probably contemplated similar deals in the past, and might have some observations to share based on your past ruminations.

A few important details:

The deal would involve me trading my current piece for a lower graded piece, and receiving a big chunk of change in exchange for my sacrifice to trade down.

In this case, the item in question is one of the Crown Jewels of my collection. I paid more for it than I’ve paid for any other single piece. And at the moment, it’s arguably the most valuable piece in my collection.

This particular piece is also very rare. For any given player, only a few are known to exist. In addition, this is a well known set that tends to be widely coveted within the hobby, so it’s not some obscure yet rare piece that no one has ever heard of. And my piece is the highest graded piece in the hobby for this player, who also happens to be an inner circle hall of famer. They don’t come to market that often, so they’re difficult to find.

I purchased my piece about 5 years ago, with a plan to keep it in my collection for a long, long time, likely until I decide to sell everything when I retire (still a long ways away).

The potential deal would involve me trading my piece for the same piece that is one grade lower. I would still have the second highest piece in the hobby for this player, which is a nice feature, and means that I don’t have to live with a gaping hole in my collection and in my heart. A close inspection of these two items suggests that they are very similar in quality. Some might even argue that the lower graded piece is as nice as the highest graded piece. And those arguments are not without merit. For purposes of this discussion, let’s assume that I’m familiar with the maxim to “buy the card, not the holder”. So for those whose response will consist of repeating this maxim, I’m hopeful that further repetition won’t be necessary. Although if I’m being honest, I’m a mindless fool when it comes to the registry.

In exchange for my “trading down”, the buyer would compensate me with some cold, hard cash. For purposes of this hypothetical situation, let’s assume that the cash component would represent about 120% of what I originally paid to acquire my piece 5 years ago. Since some of you may salivate excessively contemplating all of this cold hard cash, allow me to tip my cap to my fellow tax nerds: based on my righteous 40% tax rate on collectibles (fed + state), let’s assume that all of the cash I receive in this deal would not stay in my pocket for long, but would instead end up transiting immediately on to the tax man.

Obviously my biggest hesitation is giving up something that I haven’t planned to sell for a long time. Plus realizing that I’m giving up one of my Crown Jewels that is likely one of the best pieces I will ever own, and trading down for a lower graded piece, even if the new piece might not be very different. Plus the fact that I don’t get to really keep the cash seems to make the deal a lot less exciting to me.

What would you do?

Just curious, any update on this potential deal?

[raulus]

Originally Posted by parkplace33

Just curious, any update on this potential deal?

In case my earlier comments weren’t clear, the proposed deal never really went beyond the contemplative stage. It was proposed, I considered it for a moment, and then it was withdrawn, as the potential counterparty decided they weren’t actually ready to proceed.

So even if I wanted to do it (which clearly I don’t), it wouldn’t be possible without an open offer.