Tax question

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Posted By: Bob S

As I was wrapping up the taxes last weekend, a thought occured to me, which I've casually thought about several times before, but never followed up on.....some of you know the "procrastinator's routine.

In the aggregate card/collectible selling I've done, mostly several years ago, I always had a net loss each year. (Quite the brilliant trader, eh) LOL

Anyway, of course, they were non deductible losses due the the IRS code section re: "hobby" definition and its particulars.

But, with the recent rising collectible values, I realized that my selling from now on, or until the cyclical correction (in this trade, as most of you know, trends tend to last quite a while...reference the most recent period of decline from the late '80s peak), that I may actually have a year or years in which I have a profit. Please keep in mind, that I'm referring to the resale market and not the dealer/wholesaler market.

I'll be selling more and more items purchased near the prior bottom, not to mention the vintage card price spike, which I think will rather plateau as it finds it's peak, and not have a disasterous sharp decline. (the rule of alternation) as I age to pay the bills.

Well to finally get to the point...(hell, I should become a politico's speechwriter....most words, least real content....LOL) Is there any federal income tax to be paid on the profitable net annual sales of a "casual" hobbyist?

I'd like to get both the "theoretically" correct answer, as well, as how this issue is actually dealt with in the real world reality of how the IRS handles it.

BTW, do the big houses) (Mastro, Leland, Heritage, etc.) report income to the IRS?). I've never used them before.

You can tell I don't even know many skillful people who have had this profitabilty curse to deal with.

Thanks,

Bob

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Posted By: JudgeDred(Fred)

I suppose if you were completely forthright with the tax people then you'd claim the income. I would venture to guess that most people that do this as a hobby don't bother with reporting "gains". Now if you happen to cut loose of a T206 Wagner or something of great value then you might want to consider the consequences of cutting out the tax man.

There are people that transact in less than $10K amounts (for reasons I wouldn't know why....).

If it's a hobby then what the heck. I figure we're all going to get stuck in arse one of these days by some government internet transaction tax so enjoy the free trades/sales while you can. Who knows, in a few years people will be saying "I remember when..."

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Posted By: Frank Wakefield

I think you will find the answer is a "yes", not on net for the year, but on it all. And it is taxed as ordinary income.

But that isn't quite the worst of it. If you sell several thousand dollars worth of cards, and owe a few thousand in taxes. Just think. If you were to write a check for a few thou to anyone in the US, who could you give that money to, and be confident that it was going to be poorly spent, wasted, and spent on "wrong" activities. You guessed it! That's where your money goes.

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Posted By: dstudeba

The answer is most definitely yes. I don't have the Schedule name off the top of my head, but it is ordinary income and therefore taxed at your ordinary income tax rate (ie higher than your capital gains tax rate)

Also the losses you had in the past are deductable against the current gains. Unfortunately you never reported the losses so I am relatively sure that you would have to go back and restate those years in which the losses occured in order to deduct them now.

I agree with the previous poster who said that he doubts most people declare the income. On eBay it probably won't pose too much of a problem, but it would be prudent to report those sales made through large auction houses.

I am not a tax advisor but I did sleep at a Holiday Inn Express last night.

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Posted By: T206Collector

...people "love" Mr. Mint -- he always pays in cash.

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Posted By: James Gallo

When people deal in numbers under $10,000 that is because that is the amount when the IRS wants to knwoa bout it. It you go to the bank and cash a check for $10K they will make you fill out forms for the IRS.

I had this problem for several years before I went over to the full business end. If your making under $10,000 in profits, it likely won't make a difference and certainly won't put up a red flag.

Are you supposed to report it, sure but few people will.

I am going to be very interested to see the attempts at taxing internet trade. Should be interesting.

I would assume all the big auction houses report the income but remmeber they only make a small amount of the sale with what they charge the consingor and the buyer's premium. Also they likely have right offs like crazy so the net profit is going to be much less then the sale amount.

James G

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Posted By: Tom Boblitt

a number of times and never had to fill out any paperwork for IRS. Not that it shouldn't be reported. Maybe it's different if you cash the check but who wants to walk around with more than $10K in cash on them (other than Leon....)

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Posted By: Bob

I have paid capital gains taxes on my card selling each and every year for the last 7 years. I know most don't, but as a criminal lawyer who has visited some of these places, I have an aversion to federal pens.

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Posted By: dstudeba

Cash transactions of over 10K must be reported to the IRS, HOWEVER a bank can report cash transactions smaller than that if they believe the client is trying to avoid IRS scrutiny. Therefore it wouldn't be surprising for them to report a $9990 transaction.

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Posted By: warshawlaw

Publication 550 (2005), Investment Income and Expenses

Capital Assets and Noncapital Assets

For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Some examples are:
•Stocks or bonds held in your personal account,
•A house owned and used by you and your family,
•Household furnishings,
•A car used for pleasure or commuting,
•Coin or stamp collections,
•Gems and jewelry, and
•Gold, silver, or any other metal.

Investment property. Investment property is a capital asset. Any gain or loss from its sale or trade generally is a capital gain or loss.

Gold, silver, stamps, coins, gems, etc. These are capital assets except when they are held for sale by a dealer. Any gain or loss from their sale or trade generally is a capital gain or loss.

Personal use property. Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. However, you cannot deduct a loss from selling personal use property.


Baseball cards are not specifically referenced in the publication but I would infer from the collectibles that are mentioned that they would be treated as investment properties.

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Posted By: Mark

For non-dealers, collectibles (including cards) are capital assets, however, there is a special collectibles capital gains rate of 28%. IRC sec. 1(h)(4)(A)(i). Thus, cards do not qualify for the 15% capital gains rates that apply to normal capital assets (stocks, bonds, etc.) held more than 12 months, nor are they taxed at one's marginal ordinary income tax rate.

Also, keep in mind that the burden of proof is on the taxpayer to prove his or her basis. To substantiate basis, one would generally need an invoice, credit card statement, paypal statement, cancelled check, etc.

Auction houses are not required to report sales to the IRS, regardless of amount. See How the IRS Can Close the Online Auction Tax Gap, 2005 TNT 2-38 (December 20, 2004).

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Posted By: dstudeba

You are correct, I was wrong. I knew they were more expensive than the 15% Capital Gains, but I forgot that it was a fixed 28%.

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Posted By: Bill Stone

People love Mr. Mint because he pays cash --then the idiots agree to be photographed with him holding the cash--they deserve to be busted by the IRS!!!!!!!!!

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Posted By: Bob S

I appreciate all the great replies.

It seems that there is an illogical penalty for collectors who can't deduct losses but must report gains. But, I guess logic is an oxymoron in relation to the tax code.

I manage to live these days on ~15-18K a year, and I never had >5k in sales or purchases in a given year, much less profits or losses.

I don't want to sound like a sap, but I do like to do the right thing legally and morally. In this case there seems to be little connection between those two concepts. LOL

I just hope that I will have some profits, meaning really, enough positive cash flow, in my aging years, to make the issue relevant.

Thanks, again, folks,

Bob

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Posted By: Bob S

I went back and read my original post in this thread, and I apologize for the poor writing....it was nearly unintelligible. I edited it, in case anyone in the future wants to reference this topic in the archives.

Lastly, and I could be wrong on this...my Lyme has clouded my intellect...but it seems in one post someone said that one does aggregate their profits and losses and, if there is a net profit for that year then the cap gains tax must be paid.

Yet, I think I read in another post that tax must be paid on all transactions resulting in a gain, and no reduction in that gain can be taken from those transactions which resulted in losses.

If everyone isn't too bored already by this thread, could someone please clarify.

BTW, all this is a bit ironic/amusing, and a friend of mine who preparers taxes for mainly lower middle and middle class folks, tells me that 90% of the people want to blatantly cheat on their returns.

For example, he is often asked "How much should I take (or get away with taking) this year for charitable deductions"?

It seems, at least for the middle class, cheating on your taxes is a badge of honor.

It worries me because someone (I think it was DeTouchville), wrote that for a democracy to succeed in the long run, the citizens must willingly and happily pay their taxes, assuming they are assessed "fairly" and used for the "common good"

Of course I guess there is considerable debate as to what constitutes the terms "fairly" and "common good".

Thanks, again everyone.

Bob


PS: Is everyone getting the phrase "returnaddress", in that form, printing at the bottom of all their posts? Just curious. It seems to have just started in the last day or so.

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Posted By: Gilbert Maines

I think that for many, the cheating on your taxes, is one more in a series of desperate moves to assure that you stay one step ahead of the guy under the highway with the new refrigerator box. Not an unpatriotic "badge of honor". I hear that there are people walking around (maybe you have spoken with some, without even knowing it) who do not earn even $1000/wk, before taxes!

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Posted By: Bob

You can take the total gross income and subtract what you paid for the cards plus shipping, handling, ebay fees, paypal fees, cardholders, etc. from the total to get your net profit and pay capital gains taxes on that amount.
Caveat- I am neither an accountant nor tax lawyer, but that's the way I have done it.
The only problem would be that most of us do not keep great records of every card we ever bought which we later sold, so price guides, etc. are helpful in determining values. Who would have ever thought it would come to this? I remember reading an article about 2 years ago that the IRS had turned a blind eye toward ebay and online transactions but was going to gear up in the future, so I would strongly advise being cautious and paying the devil his due in the future.

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Posted By: warshawlaw

You could start a business and do a Schedule C or C-EZ with your tax return. You could then deduct all of your expenses including show attendance, inventory acquisition, etc., and take the net profit (loss) as income from a business. You also could start a business entity and flush the activity through there.

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Posted By: Judge Dred (Fred)

I don't do a lot of selling so I don't have a lot of reason to worry about capital gains on cards sold in any given year but after reading the responses to this inquiry I was wondering just how many people actually will try to sum and total their gains in a year and then report these gains to the IRS? I can understand if you are dealing in thousands and thousands of dollars but, seriously, how many people are going to report a $300 (or even a $600) capital gain in a years time?

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Posted By: honus3415

For what it's worth....according to my accountant that slept at a Holiday Inn Express last night....you'll have to forgive me because I didn't and can only remember the jest of his technical jargon.

All personal sales (ebay, auction houses, card shows, yard sales and the like) require being reported on the income side of one's yearly taxes. The opportunity to offset any gains from those sales with expenses (losses, shipping, storage, insurance fees....) can only be used when one has this collection activity registered as a business with the appropriate record keeping in place (including state yearly, quarterly or monthly reporting).

As far as the IRS tapping into ebay's data bank, I have heard of instances where households (not businesses) did attract audits with regards to unreported ebay sales. Wheather this was based on activity volume, dollar amounts or whistle blowers I never knew. But yes, according to ebay a couple years ago, they are required to make all requested activity information available to the IRS since their inception. I wouldn't be suprised if this data included all transaction information down to the IP address or physical card address of the computer involved in each transaction. This may seem like a lot of information but in the electronic world today it's hardly more different than two words on your IPOD.

With the growth of the National Debt, it's probably only a matter of time before the government actively taps this "electronic oil field" and publically starts selling their own PSA graded "George Orwell Collection".

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Posted By: Mark

Bob S.: You can definitely offset your card gains with your card losses. You can carry forward any nondeductible hobby losses until you have hobby profits. Like Dan said, if you haven't reported these losses you would need to amend your returns (assuming the 3-year statute hasn't run).

It would take a lot of manpower for the IRS to audit ebay sellers. The IRS would waste a lot of time on people claiming they had a higher cost basis than the amount of the sale, but didn't save the receipt for that used lava lamp or lawn furniture. I'm sure a lot of these types of people would take the IRS to court. It would be much easier for states to go after buyers who purchase goods from out-of-state and don't pay their use tax. In most states, if you buy a bb card for your personal collection from an out-of-state seller, you owe 5-8% in use tax. I think states will start cracking down on use tax before the IRS cracks down on ebay sellers.

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Posted By: B.C.Daniels

Kiplinger Tax Letter?


I just received my latest Kiplinger Tax Letter, a bi-weekly report of the happenings on Capitol Hill respecting recent tax issues. Attached is a copy of a section of the latest issue with a blurb about PayPal and eBay. I hope that we don't have to test which one of us is right about whether your eBay transactions are taxable through an audit. But you should be aware that the IRS is now "scouring records of PayPal" to, in part, "help pinpoint unreported income from eBay sales."


if you read down about three quarters of the way through the letter dated April 21st you will find the above!

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Posted By: Rick

I don't want to be looking over my shoulder worrying about unreported income, so I keep track of every sale and every expense. I pay sales tax on my sales when applicable,and if I show a profit at the end of the year I pay the taxes on that profit. When I drive to a card show I keep track of mileage, fees, and other expenses to offset some of my income. I deduct my ebay fees, picture hosting fees, paypal fees, and many other items, all of which are legitimate expenses.

Keeping track of all of this can be a pain in the butt, but it is worth while. It also lets me know if I am buying and selling at the right price, and at the end each year I have a fairly accurate estimate of the value of my collection.

Rick

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Posted By: Bob S

Thank you all for the many great replies to my thread. My late wife and I decided 35 years ago, that we would always take less deductions than we were entitled to and report all income, just to be safe in case of an audit.

I have said before, that taxes are a necessary evil, and the "willingness" to pay your fair share is necessary to sustain a democracy in the long run.

I'm not here to lecture those who cheat, but, remember our future generations, and the benefits of a truly free society.

Also, please excuse my typos....my illness makes typing quite a chore, and I haven't yet found a voice based typing program that really works.

Best to all.

Bob

PS: BTW, B.C.Daniels, your attachment did not show in your post.






returnaddress

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Posted By: anthony

i asked my tax accountant the same question last year...for me it boils down to this: if i am going to claim all the ebay fees, paypal fees, shipping fees, mileage to/from post office, losses, etc, etc, etc...then i need to claim a profit once in awhile...the only thing is, you cant claim a loss for a hobby/business for 10-12 years in a row, irs will catch on...just my two cents

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Posted By: Charlie O'Neal

This is how I am looking at the tax question getting out of some of the taxes. I am working on setting up a LLC or S corp for my stock market plays in order to cut down on the capital gains tax from profits. Also I will add my cards into the business as a investment (no hobby or business). When I do decide to liquidate the cards then my taxes will not be as high as if I sold them without being under the corp. title. If for some reason the cards drop dramitically before I get rid of them then (hopefully with stock market gains throughout the year) I can just take the investment loss with the cards and write them off my taxes. I still have to make sure the lawyer says that the plan is alright with him before doing it this way. From my early caculations it will save me about 15% in taxes

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Posted By: dstudeba

I hope Mark weighs in on this one, but I am interested on exactly how your taxes will be less in an LLC? I was always under the impression that for tax purposes an LLC was a pass through entity meaning that the LLC paid no taxes, only the owners, and taxes were paid at the owners' personal tax rates. Unless you somehow save by a loophole turning short term capital gains into long term capital gains, I am ignorant as to how this will save you tax money.

edited to add:

For an S corporation if you were a licensed securities broker I guess you could argue that the stock was inventory. Then any gains would be profit to the corporation and taxed at the corporate tax rate. But anything that you took home would then be taxed again as a dividend. Right? (I am just thinking outloud here as I know little about corporate taxes and structures)

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Posted By: Charlie O'Neal

An S corp is just like an LLC in that the taxes passes right through to your personal income and you are taxed there. from my understanding you can be taxed at a personal rate of up to about 30% for capital gains but if if you through a S corp it is normally around 15% not real sure about the LLC rate. The example was given using Deleware's system for running a company. The laws there are different from other states in regards to building a corp. b/c of the laws and regulations. Since I live in PA it is worth my while to set up in Deleware b/c of the tax differences and then just rent out a P.O. Box in Deleware as my business address. All this information is based on speaking with a couple of friends that have either done this in the past or currently doing it right now. As I stated in the earlier post I would need to speak with a coperate lawyer to make sure that what I am being told is correct and legal.

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Posted By: Mark

Dan: I agree with you that it's not at all helpful from a tax perspective to put investment assets in an LLC, partnership or S Corp - all are pass-through entities and the hobby loss rules apply to each, just as they do to individuals. But my Kiplinger tax letter subscription just ran out so I'm pretty much shooting from the hip.
Mark