Selling in volume regarding taxes.

[sbfinley]

During this calender year I've evolved in the hobby from strictly buying to buying and selling. I am not a dealer in any right, but if I see something below market price I'll pick it up to try and turn it. I don't do it to make a living, but seeing as I am back in school full time it is more like a supplementary stipend to fund my own purchases. I understand that if you have more than $20k in non gift transfers or 200 total transactions through paypal you'll get a 1099. My question is, do you have to have a LLC or similar business license to show the IRS your true gains on that amount. (Example: Lets's say I get a 1099 showing that I received $23,500 this year from eBay sales, but in reality I only cleared $3,500 from that same sales. Without any form of business entity formed am I stuck paying taxes on the full amount or can I show my costs as well?) Also being that gift payments are exempt from the 1099 are gift purchases also exempt from inventory costs? Any help would be appreciated.

[Gradedcardman]

You can show costs to offset the 1099 sales from Paypal. I am trying to be very careful in my ledger keeping. Your tax preparer will fill out a schedule C. This is what is done when it turns from hobby only to business when you do not incorporate.

I am sure others on the board have more precise information but after being audited I have gained a bit of useful knowledge on the subject.

[Leon]

As far as having a company or LLC or other entity, check with a CPA, but I think you can file any gains/losses under your SSN.

[RobertGT]

I have been in this category for three years. Here is what I have learned:
- You do not need to create a LLC and you will be responsible for showing your costs when you file under your SSN.
- Since you are keeping track of your costs, anything you spend on your business pursuits is a legitimate expense, including paypal gifts, eBay fees, grading fees, mileage expenses, hotel room stays, food, shipping supplies, office expenses, inventory storage costs and of course the product you buy.
- Keep all receipts and use them to show what your true profit is, if any, at the end of the year. It's all legit and using the government's own rules.
- You will then only be taxed on the profit that you show.
-The IRS will only send you a 1099 if you hit at least $20K in gross sales coming into paypal AND have 200 or more transactions. Good luck.

[steve B]

When I was active on Ebay I always declared a slight profit as a hobby business. I included some bicycle work done for cash, as well as Ebay sales, less the cost of the storage space I kept most of the inventory in.

I had decent records showing what was actually a net loss if I counted everything I could, but for simplicity didn't even try to claim the computer and the space in the house. I think hobby businesses aren't allowed to show a loss, but checking with an actual tax preparer would be best.

Steve B

[Section103]

Legal entity is NOT required.

CPA

Also, you get what you pay for.

[sbfinley]

Thanks for all the input!

[birdman42]

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

[sbfinley]

Thanks Bill! If an issue comes up around tax time I'll certainly PM you for your services!

[thecatspajamas]

Originally Posted by birdman42

breaking up lots;

Bill,

I'd be curious to hear your take on this as it relates to remaining inventory value/cost of goods sold, as most non-hobby professionals I've talked to don't seem to understand that the "value" of most purchased collections cannot be split evenly among its pieces, and sometimes value of a particular piece cannot be determined until it is sold, which may or may not happen in the same calendar year that the collection was purchased.

Or am I just making this unnecessarily complicated?

[Leon]

Originally Posted by thecatspajamas

Bill,

I'd be curious to hear your take on this as it relates to remaining inventory value/cost of goods sold, as most non-hobby professionals I've talked to don't seem to understand that the "value" of most purchased collections cannot be split evenly among its pieces, and sometimes value of a particular piece cannot be determined until it is sold, which may or may not happen in the same calendar year that the collection was purchased.

Or am I just making this unnecessarily complicated?

Bill can answer way better than I can, but the way I do it, is I take the total number of pieces bought and divide that number by the total price paid. That is my true cost basis per piece of a lot. The sell price is irrelevant and some will be high and some low, but the cost per piece is the same. As a cost basis it all equals out that way. As far as time you own something, I think that will have more to do with long or short term gains. Consult a tax professional >

[birdman42]

Originally Posted by thecatspajamas

Bill,

I'd be curious to hear your take on this as it relates to remaining inventory value/cost of goods sold, as most non-hobby professionals I've talked to don't seem to understand that the "value" of most purchased collections cannot be split evenly among its pieces, and sometimes value of a particular piece cannot be determined until it is sold, which may or may not happen in the same calendar year that the collection was purchased.

Or am I just making this unnecessarily complicated?

Lance,

Yes it's unnecessarily complicated, but that's not your doing. Pin this one on our tax code.

It's true that you don't always know what you'll get for an item until it actually sells, but you know what you figured it at when you bought the group, so that's an acceptable valuation.

Hobby purchases are treated differently from business purchases.

Hobby:
How to handle a lot breakup depends on what you're doing with the lot. If you buy it with the intent of breaking it up and selling it all, there probably isn't much difference between assigning individual values and simply splitting the cost evenly among all the pieces. But if you're buying a lot for one or two items and selling off the rest, then it does make a difference.

Say you buy a lot of 12 T207s for $600. There's a Johnson (which you want to keep) and 11 commons. You sell off the commons for $40 each ($440), so in your mind you now have $160 in a nice WaJo. Can you show a tax loss of $10 each on the commons? Probably not a good idea, because that leaves you with a basis of only $50 in the WaJo. When it comes time (in a few years) to sell off your collection, the IRS would frown on that valuation, saying that you were improperly offsetting current income with long-term capital gains. (Not looking for a response here, but a board member recently faced a similar decision. He posted an extremely rare card that he bought in with a group of commons.)

Business:
If you're talking about inventory and cost of goods sold, that's a business. Then it doesn't matter how long you hold onto something before you sell it; inventory is an asset rather than an investment, so it's all profit taken now or later and all taxed the same. You do need to assign a value to your inventory, but as long as you're consistent in how you assign values it all comes out even in the end.

Leon's way of dividing price by # of pieces will work in a general sense, but if, say, you bought a 520 set of T206 for $26,000, it wouldn't make sense (or be supportable if it came to that) to value the Cobbs and the Schaefers all at $50 each.

Bill

[Leon]

Originally Posted by birdman42

Leon's way of dividing price by # of pieces will work in a general sense, but if, say, you bought a 520 set of T206 for $26,000, it wouldn't make sense (or be supportable if it came to that) to value the Cobbs and the Schaefers all at $50 each.

Bill

Bill- great stuff and thanks for posting. So I have a question as a layperson. As I said before, I have a CPA and another (EA) accountant who do my taxes and books so I won't personally make mistakes (and they are pretty good and don't make many). But if I buy a near set of 520 T206s, and ascribe my cost basis of $50 for each one, and add or subtract the sale price of each one, why wouldn't that work?

[npa589]

Bill:

Even though I didn't start this thread, these were all questions I've had for a few years. Thank you for making available your expertise with such willing generosity.

I think you hinted at this in this answer, but I wanted to ask specifically if it was okay to: assign value to a card within a lot for the calendar year it was purchased, and if not sold that year, I carry it over to the next year as a value/cost/expense of "0$", and kept the expenses in the year they were purchased during. The way I see it is that it evens out in the end, because, in that year I sell it in, I am recording it as pure profit. I've done that 2010-2012, and it was not an LLC at that time. It became an LLC in October of this year though, so I may need to do something different. Is the way I've done it from 2010-2012 moronic?

Originally Posted by birdman42

Lance,

Yes it's unnecessarily complicated, but that's not your doing. Pin this one on our tax code.

It's true that you don't always know what you'll get for an item until it actually sells, but you know what you figured it at when you bought the group, so that's an acceptable valuation.

Hobby purchases are treated differently from business purchases.

Hobby:
How to handle a lot breakup depends on what you're doing with the lot. If you buy it with the intent of breaking it up and selling it all, there probably isn't much difference between assigning individual values and simply splitting the cost evenly among all the pieces. But if you're buying a lot for one or two items and selling off the rest, then it does make a difference.

Say you buy a lot of 12 T207s for $600. There's a Johnson (which you want to keep) and 11 commons. You sell off the commons for $40 each ($440), so in your mind you now have $160 in a nice WaJo. Can you show a tax loss of $10 each on the commons? Probably not a good idea, because that leaves you with a basis of only $50 in the WaJo. When it comes time (in a few years) to sell off your collection, the IRS would frown on that valuation, saying that you were improperly offsetting current income with long-term capital gains. (Not looking for a response here, but a board member recently faced a similar decision. He posted an extremely rare card that he bought in with a group of commons.)

Business:
If you're talking about inventory and cost of goods sold, that's a business. Then it doesn't matter how long you hold onto something before you sell it; inventory is an asset rather than an investment, so it's all profit taken now or later and all taxed the same. You do need to assign a value to your inventory, but as long as you're consistent in how you assign values it all comes out even in the end.

Leon's way of dividing price by # of pieces will work in a general sense, but if, say, you bought a 520 set of T206 for $26,000, it wouldn't make sense (or be supportable if it came to that) to value the Cobbs and the Schaefers all at $50 each.

Bill

[egbeachley]

Originally Posted by Leon

Bill- great stuff and thanks for posting. So I have a question as a layperson. As I said before, I have a CPA and another (EA) accountant who do my taxes and books so I won't personally make mistakes (and they are pretty good and don't make many). But if I buy a near set of 520 T206s, and ascribe my cost basis of $50 for each one, and add or subtract the sale price of each one, why wouldn't that work?

Think of it this way, by using an extreme example. let's say you arrange a purchase of a T206 Plank for $50,000. But right before the purchase is completed you ask for the seller to throw in 4 T206 beaters that are essentially worthless. By using this method you have given yourself 5 cards with a $10,000 cost basis each.

During the next 4 years when you are in a 30% tax bracket you sell other cards and make a profit of $10,000 but also sell one of those T206 beaters for 1 cent. Your profit becomes $0 for each of those 4 years. 10 years later you eventually sell the Plank for $60,000 which gives you a $50,000 profit but you sell it the year after you retire and are in a 10% tax bracket.

Years 1-4 profit should be $10,000 and if in 30% tax bracket = $12,000 taxes.
Year 15 profit should be $10,000 and if in 10% tax bracket = $1,000 taxes.

Instead you have $50,000 profit in 10% tax bracket = $5,000 taxes.

So, in other words, if you apply high and low valued cards the same you can manipulate sales to lower your tax bill.

[Jantz]

Steven

It may be possible to write of your internet bill as an expense too.

I'm no CPA, so maybe Bill can clarify that for you here.


Jantz

[ValKehl]

Hi Bill,
Thanks for the comprehensive info you presented in Post #8. Do I correctly understand that this info applies only to sports collectibles "dealers" (selling at shows, on-line, and/or via brick-&-mortar shops)? If you are "dealing" with a profit intent, then it's Form 1040-Line 12, supported by Schedule C. If you are "dealing" without expecting to make a profit, the IRS considers you a hobbyist, and your net sales (gross sales less cost of sports collectibles sold) go on Form 1040-Line 21, and your operating expenses are deductible on Schedule A (if you itemize, and subject to the limitation you described).

But, I believe most of us Net 54 members are merely "collectors" whose do sell some of our sports collectibles from time to time as we upgrade items in our collections, change our collecting focuses, etc. Is my understanding correct that when "collectors" do this, we come under the IRS's rules for gains on the sales of "collectibles" which I believe are taxed at 28%? Since sports collectibles are considered capital assets, this involves reporting capital gains on Form 1040-Line 13, supported by Schedule D, supported by Form 8949 (for most folks, I think), along with using the 28% Rate Gain Worksheet and the Schedule D Tax Worksheet in the Form 1040 Instructions book - right?

If my comments above about "collectors" are correct, how does the IRS distinguish between a "collector" selling "collectibles" and a "dealer" who does not have a profit intent? Would it be the amount and frequency of selling activity? The reason I ask is I have always used the Schedule D-Capital Gains approach, as I was not aware of the Form 1040-Other Income approach (which seems to me to be much simpler, to the extent that anything is simple when it comes to income tax forms and rules!) (and, which could result in a less-than-28% tax rate) that you described in your post.

Thanks in advance for your response,
Val

[birdman42]

Originally Posted by Leon

Bill- great stuff and thanks for posting. So I have a question as a layperson. As I said before, I have a CPA and another (EA) accountant who do my taxes and books so I won't personally make mistakes (and they are pretty good and don't make many). But if I buy a near set of 520 T206s, and ascribe my cost basis of $50 for each one, and add or subtract the sale price of each one, why wouldn't that work?

Leon:
Eric got this one exactly. Companies do this kind of cost-shifting all the time, even though it's somewhat shady. An example of how this would work to someone's advantage (if they get away with it):

Last month (October) you bought a 520 near-set for $26,000. You've had a great year in the business, and you realize you're looking at a monster tax bill for the year plus now you have cash flow problems from all the money tied up in the set. So you value each card at $50 then sell off 300 commons this year for $20 each. You've just created a tax loss (a reduction in your overall profit) of $9,000 for yourself. You then sell the rest of the set in 2014. Whatever profit you make shows up as 2014 income, when overall business might not be so good or you anticipate an unusual expense. {Disclaimer: This is not to be considered advice on how to beat the system.}

If you're set up as a sole proprietorship, partnership, S corp, or LLC, all the income flows directly to you personally and gets taxed at your marginal rate. In the 28% bracket that's a difference this year of $2,520 in taxes. If you're consistently in the same marginal tax bracket from year to year, it won't make much difference in the end. But if your income fluctuates significantly, or you're right at the edge of a bracket, then when you take income can matter a lot.

As I said in an earlier post, if you're consistent with your method of valuation you can probably justify it. But if you skip around from year to year, or from purchase to purchase, you're asking for scrutiny. Even if you don't get dinged for more taxes, you've gone through an investigation that's taken time and money you'd rather use for other things.

Originally Posted by N.ate

I think you hinted at this in this answer, but I wanted to ask specifically if it was okay to: assign value to a card within a lot for the calendar year it was purchased, and if not sold that year, I carry it over to the next year as a value/cost/expense of "0$", and kept the expenses in the year they were purchased during. The way I see it is that it evens out in the end, because, in that year I sell it in, I am recording it as pure profit. I've done that 2010-2012, and it was not an LLC at that time. It became an LLC in October of this year though, so I may need to do something different. Is the way I've done it from 2010-2012 moronic?

Nate:
Again, once you're talking about inventory then it's a business. You can't treat product inventory as an expense; that's for things like supplies and raw materials. If you buy a closeout deal of 10,000 CardSavers, you can expense the whole amount that year even though you take 3-4 years to use them up. But if you buy a group of cards, you can't expense the whole purchase in the first year; you have to take it as Cost of Goods in the year in which you sell an item.

Nate, I'll PM you with more info. General discussions about tax matters are fine on the board, I think, but talking about specific circumstances calls for privacy.

Originally Posted by Jantz

It may be possible to write of your internet bill as an expense too.

Jantz:
Once you get into taking things like part of your Internet and phone bills, travel, etc, you're looking more and more like a business rather than a hobby. A big tax advantage of a business is that you can deduct all your expenses, without regard for the 2% floor. A big tax disadvantage is that any income is now considered earned income the same as wages, and that means paying FICA and Medicare taxes in addition to income tax. For 2013 that's 15.3% on marginal income up to $113,700 and 2.9% on income above that--but you get to claim half that amount as an expense. (I didn't write the tax code, I just explain it.)

Originally Posted by Val

Hi Bill,
Thanks for the comprehensive info you presented in Post #8. Do I correctly understand that this info applies only to sports collectibles "dealers" (selling at shows, on-line, and/or via brick-&-mortar shops)? If you are "dealing" with a profit intent, then it's Form 1040-Line 12, supported by Schedule C. If you are "dealing" without expecting to make a profit, the IRS considers you a hobbyist, and your net sales (gross sales less cost of sports collectibles sold) go on Form 1040-Line 21, and your operating expenses are deductible on Schedule A (if you itemize, and subject to the limitation you described).

But, I believe most of us Net 54 members are merely "collectors" whose do sell some of our sports collectibles from time to time as we upgrade items in our collections, change our collecting focuses, etc. Is my understanding correct that when "collectors" do this, we come under the IRS's rules for gains on the sales of "collectibles" which I believe are taxed at 28%? Since sports collectibles are considered capital assets, this involves reporting capital gains on Form 1040-Line 13, supported by Schedule D, supported by Form 8949 (for most folks, I think), along with using the 28% Rate Gain Worksheet and the Schedule D Tax Worksheet in the Form 1040 Instructions book - right?

Val:
You are correct about the occasional sale of a collectible item. In general a sale is treated the same as any other investment item, and so should be reported on Schedule D. You can't take a net loss for the year on collectibles held for personal use. But my understanding is that you can use losses to offset gains for the same year. So if you sell a card for a $1000 gain in June and another for a $600 loss in September, you report a gain of $400.

It becomes a question of pattern, scale, and intent. I've been part of an auction lot purchase, in which each of us put in money to equal the total cost. No profit there, so no hobby income. But if you buy a lot on your own, with the intent of breaking up (and keeping some for yourself, or not) then that's at least hobby income. In the OP's example, he's looking for good deals to resell, so the intent is clearly to make a little money out of it. For the weekend dealer who sets up once a month at a mall show, that's probably a hobby and goes on 1040 and Sched A. Set up a couple times a month including larger regional shows, offer your cards for sale on the Internet, and travel to set up at a couple large shows a year, and it's probably a business. There are no bright lines between.

All for now,

Bill

[TipTopBread]

Taxpayers who engage in activities for recreation or pleasure frequently are not trying to make a profit from the activity. Special tax rules apply to income and expenses generated from a not for profit or hobby. While most taxpayers who engage in a trade or business activity with a profit motive report their income and expenses on Schedule C, (profit or loss from Business, sole proprietorship), hobby income is reported on FORM 1040, LINE 21. The deduction for related expenses is limited to the amount of income reported.
Good luck with your return!

[ValKehl]

Hi Bill,
Thanks for responding to my questions and for confirming the Schedule D-Capital Gains approach. In the past, I have used Schedule D when I have sold cards from my collection, and I have used Schedule C when I sold cards that were part of a large lot that I bought to obtain certain cards for my collection. Now, I have learned that it is appropriate to use the "Other Income" Line 21 on Form 1040 instead, which is not only less hassle but also eliminates paying the FICA & Medicare Tax on Schedule C income. Many thanks for sharing your income tax expertise with all of us.
Val

[Fred]

Steve,

In your hypothetical situation you are only making 15% on your investment. There are times when you could have made more money on some cards and less money on other cards. That would mean that you may have made only 8% -10% on some cards and perhaps you made 23%-25% on other cards. In that scenario it'd be pretty ballsy to try and make 20 bucks off a $250 dollar purchase. My idea of buying cards under market is probably a bit different. Hey at least you're not too greedy....

Just funnin around with your hypothetical, that's all....

[BobC]

Sorry I didn't see this thread sooner or I would have weighed in at the start. Bill T. has done a great job of explaining some of the rules regarding hobby versus business treatment of selling cards. Based on some of the questions and comments made in the thread though, I'm not sure everyone has a real good understanding of what Bill was trying to explain. I wanted to add a few things for clarification and practical consideration.

The rules for determining if an activity is considered not-for-profit (ie: a hobby) are generally covered under IRC Section 183. As Bill T. stated, the specific things the IRS looks at are not always yes or no answers and they will look at all the factors in making their determination of business vs. hobby. Included in this code section is a test the IRS relies upon in their determination process that is commonly referred to by tax professionals as the "Hobby Loss Rule". SImply stated, it is presumed by the IRS that you are engaged in an activity for profit (ie: you are a business and not a hobby) if you made a profit in at least three out of the past five years. The IRS can/may still look at the other factors in their determination but, the fact that an activity meets this test means the IRS will generally not challenge the reporting of that activity as a for-profit business.

The implications of that determination can be both good and bad for someone selling cards to "just support their hobby". If I had a dollar for everytime I heard that comment come from people on this forum, I'd probably be able to afford a T206 Wagner. So if you consider yourself as just being in a hobby and therefore report you gross profit from selling cards as Other Income on Line 21 of your federal 1040 tax return, that should be fine. However, if after five years you reported a taxable profit on your 1040 return from your so-called hobby in three or more of those years, under the "Hobby Loss Rule" I mentioned above, the IRS presumption is that you are engaged in a for-profit business and not a hobby. The service can still look at the other factors to make a final determination but, most of you aren't going to like the answers. Included in the list of other factors the IRS looks at are questions like:

Do you have the knowledge to run this activity for profit/as a business?
Do you ever change methods of operation to improve profitability?
Do you expect to make a profit from future appreciation of assets in the activity?
Do you put in the time and effort to this activity expecting to make a profit?

Most of you would likely have to answer yes to these questions. Heck, the statement that most of you make saying you sell cards to fund buying other cards is a clear indication you're out to make money on the cards you do buy and then sell. So in the IRS' eyes, a lot more of you could end up being in a business than in a hobby than you would ever guess.

To recap the major good and bad points of being in a for-profit business vs. a hobby are:

Good:

1) You can claim all ancillary and other related costs to carrying on the business (not just the direct cost of goods sold) as deductions on your 1040tax return as a Schedule C activity, or if you set up a formal entity, through a partnership, S-Corporation or regular corporate tax return.

2)

[BobC]

Sorry, ran out of room on the last post.


Good:

2) You can even deduct things like a home office and related expenses, including mileage to go look at cards, shows, etc.

Bad:

1) You are considered as a dealer in cards and all profits are considered as ordinary income. You do not get the benefit of being able to treat your profit as being from the sale of "collectibles", which are limited to a top tax rate of no more that 28%.

2) Being in a for-profit business, all net income (Gross income - COGS - Expenses) you report will be subject to self-employment taxes. That is the same as the FICA and Medicare taxes an employer withholds from an employee on their paycheck (7.65%) plus, you also have to pay the other half of those taxes (7.65%) the employer is normally responsible for. That is how those taxes get up as high as 15.3% The annual FICA limit does come into play and caps the 12.4% FICA tax at a certain amount each year. The remaining 2.9% of Medicare tax has no annual cap. Also, you get a tax deduction equal to employer's deemed 50% portion of self-employment taxes you pay. This gets deducted on page 1 of the 1040 return. (There would be no self-employment tax if you set the business up in a corporate entity.)

3) To be able to actually claim all the deductions, you need to keep good, clear records and copies of supporting documentation and receipts. If the IRS questions you it is not like a court of law, there is no presumption of innocence. The burden of proof is on the taxpayer and the IRS gets to determine what they consider/accept as reasonable proof. This also includes evidence to prove the cost basis of inventory. Those cards you bought at a mall show for $100 cash 20 years ago, how do you prove that basis to an IRS agent today? See the problem?

For the earlier question/discussion about buying a group of cards where say one card is much higher in value than the others, before you even worry about how to allocate the value amongst the cards, make sure you have something to document the cost of the cards and what cards you got? Without that you can't even prove you have any cost for any of the cards. And then, the idea of spreading the cost evenly over the group of cards so that you falsely inflate the value of the less valuable ones you acquired is not necessarily an acceptable method of determining the inventory value of those cards. If under audit an IRS agent discovered that you had arbitrarily just assigned an average value to a card that was acquired as part of a group, and that the value assigned was way out of line with the actual cost, the agent would be able to adjust the inventory values to properly reflect the true values/costs of the cards. The real truth is, for that to happen you would have to get audited and then have an IRS agent that actually knew something about cards and their values. Then, the amounts in question would have to be large enough to actually make a significant tax difference for the agent to even bother with it.

Another area you touched on was whether or not you reported gross profit from card sales as Other Income on Line 21 of a 1040 return, or as a capital gain transaction on Schedule D. First of all, you would only report your gross profit from card sales in either of these places if you were operating the activity as a not-for-profit hobby, and not as a for-profit business. Card sales are a bit unique under the IRS rules in that gross profit from selling them can be considered as sales of collectibles. The Tax Relief Act of 1997 put the special treatment on gains from collectibles sales in effect. What it does is make the long term gain from sales of collectibles subject to a tax rate cap of 28%. This is similar to the current 20% tax rate cap on long term capital gains from the sale of stock, just capping the max rate at a higher amount. To get that 28% capped rate though, you have to report hobby activity card sales on Schedule D. If you report the gross profit from the card sales as Other Income on Line 21 of the 1040, it will not allow you to cap the tax rate on those cards sold at 28%. Also remember that capped rate is only for "long term" sales. In other words, you must have held the cards sold for at least a year to get the capped rate to be in effect. If held less than 12 months, the sale is considered short term and is subject to ordinary income rates up to the current max rate of 39.6% this year. Also, don't forget the wonderful Obamacare Medicare surtax on investment income. Depending upon a taxpayer's reaching certain levels of Modified Adjusted Gross Income this year ($200K single/$250K married filing jointly) the profit from both short and long term gains from collectibles sales will also be subject to an additional 3.8% investment income surtax. (A very good question is if you reported the card sale profit as hobby income on the Other Income line instead of Schedule D, would it still be subject to the 3.8% Medicare surtax on investment income? Did not research this but, would think not and wouldn't expect the IRS computers to catch this either.)

Speaking of the Obamacare surtaxes that take effect this year, if you end up having your card sales treated as if from a for-profit business (ie: subject to self-employment taxes), that means the net income from the activity is considered Earned Income and then potentially subject to the 0.9% Earned Income surtax. This Earned Income surtax kicks in for taxpayers after reaching the same Modified Adjusted Gross Income levels that trigger the Investment Income surtax.

Finally, you can't just pick and choose from year to year whether you're a for-profit business or not-for-profit. You are either one or the other. So in a like manner, you're probably not going to be able to segregate your card buying activity and say some cards you buy with the intent to resell are business related while other cards you buy at the same time and hold for your personal collection are part of your hobby activity. Remember, the burden of proof is on you. Just because you say you are making a card purchase part of your personal collection doesn't mean you couldn't change your mind and end up selling it tomorrow. So if you get determined to be selling cards for-profit and then turn around and sell one you've held in your personal collection for a long time, and try to report that as a long temr collectible sale instead, good luck if the IRS questions the transaction. Still, the chance that the IRS computers would be sophisticated enough to realize a Schedule C business actibity you had selling cards would be related to a collectible sale on Schedule D is pretty much nil. So unless you get unlucky and are pulled for an audit, and even then the agent involved would probably have to have some knowledge of cards/collectibles, and the dollar amounts involved would have to be significant enough to have a material effect on your income taxes, you're probably not going to get hassled about the tax treatment on your return.

Good luck.



BobC