When Doing a Trade

[ValKehl]

Originally Posted by BobC

That isn't entirely true. Even if you straight up trade cards for cards, and no cash trades hands, that is a barter transaction and the IRS views it as a fully taxable event.

Bob, this seems totally contradictory to me if one is a cash-basis taxpayer for income tax purposes, which I believe most individuals are.

[Stampsfan]

Whatever happened to the guy who was going to trade some obscure card up for a 52 Topps Mantle, and was tracking it. He ended up getting a lot of commons and it died slowly, IIRC.

[nebboy]

Originally Posted by Stampsfan

Whatever happened to the guy who was going to trade some obscure card up for a 52 Topps Mantle, and was tracking it. He ended up getting a lot of commons and it died slowly, IIRC.

I was the guys that made the 1st trade with the (trade up to a 52 mantle) guy when I gave up some lesser T206 hof cards ect., for a graded 3 veg 205 Johnson, I took a little heat over that one because some felt I gave to much or they didn't like that guy or what he was trying to achieve. His quest did flame out after a few trades and I beleave after trying another hobby related start up, ended up moving away from Net54.

Still have that T206 Johnson

[bnorth]

Originally Posted by nebboy

I was the guys that made the 1st trade with the (trade up to a 52 mantle) guy when I gave up some lesser T206 hof cards ect., for a graded 3 veg 205 Johnson, I took a little heat over that one because some felt I gave to much or they didn't like that guy or what he was trying to achieve. His quest did flame out after a few trades and I beleave after trying another hobby related start up, ended up moving away from Net54.

Still have that T206 Johnson

I believe he left after trying to screw a guy in a set break on the Mantle. After some time he finally made the person right on the card. He would buy very obvious fakes on eBay. Then come on here and complain about the scammers on eBay selling fakes for pennies on the dollar.

[egri]

Originally Posted by bnorth

I believe he left after trying to screw a guy in a set break on the Mantle. After some time he finally made the person right on the card. He would buy very obvious fakes on eBay. Then come on here and complain about the scammers on eBay selling fakes for pennies on the dollar.

I remember him; after buying boatloads of obvious fakes off Craigslist, he’d then get pissy when members would tell him to take some time to study the cards and learn to tell a reprint from a real one. Him and Kevin would butt heads all the time; probably the only time I ever agreed with Kevin.

I’ve done a few trades here throughout the years, but the issue for me is my wantlist and my duplicates are very specific, so the odds of someone both having something on one list and wanting something on the other are pretty remote. I’ve had better luck just buying straight up.

[Exhibitman]

Bob, isn't the outcome taxable but effectively tax neutral if the parties trade evenly valued items? Isn't the income on that deal zero?

More to the OP, one of the things I've missed about shows is the ability to trade. Every year at the National there's a boxing collector who sits down with me the first evening and trades for items in my sale inventory. We throw all sorts of stuff on the trading bloc and see who gets what done. Can last for hours and get as complex as a multi-team NBA salary cap trade but usually works out because he wants rarities and I want stuff that will move at the show better than the rare items. In some ways my end is easy because I put price tags on my inventory, so what I think the item is worth is already out there and all we have to dicker over is the value of his stuff.

The difficulty that I have trading for my PC is that I've always been drawn to quirky, offbeat, non-mainstream cards and memorabilia. How do you value items that are unique or that have few known examples that haven't sold in a long time? I certainly can't rely on a single 2011 sale as a comparable. So I analogize to similar cards, but there is always that unknowable variable that only an auction result can establish. Case in point: someone recently tried to work with me on a rare card I had, but no matter what we tried we simply could not agree on a base value because the card never sells. I had a list of cards I thought were comparable but he disagreed. Ultimately, I was pleased to keep the card.

[BobC]

Originally Posted by Exhibitman

Bob, isn't the outcome taxable but effectively tax neutral if the parties trade evenly valued items? Isn't the income on that deal zero?

Hi Adam,

You and I decide to trade cards that are both currently worth $1,000 each. I acquired mine about 20 years ago, already in an SGC slab, and paid $350 total for it back then, which included S&H. The card you're trading to me, you acquired raw 7 years ago for $450, which also includes the shipping and handling. You subsequently sent your card in to PSA to have it slabbed, and paid $35 for the grading of the card at that time, plus an additional $10 for the postage, there and back, to have the card graded and returned to you. And we do the trade remotely so we both mail the cards to each other, and the tracking, insurance, and everything costs each of us $12.

So on my side of the trade, I get $1,000, the current value of the card you sent me. I offset that by the $350 in total I paid to acquire the card I traded to you for it, and further offset the value of the card you sent me by the $12 in postage and related costs to send you my card in trade. I end up with a taxable gain of $638 ($1,000 - $350 - $12) to report on my tax return. The tax basis of the card I traded you for is $1,000 in my hands.

On your side of the trade, you also get a card currently valued at $1,000. That is offset by the $450 you paid to originally acquire the card you traded me, along with the $35 you paid to have the card subsequently graded and the additional $10 in postage you spent to do so, and finally by the $12 in postage and related costs you spent to send me the card you traded to me. You end up with a reportable taxable gain of $403 ($1,000 - $450 - $35 - $10 - $12). And the tax basis of the card you traded me for is also now $1,000 in your hands.

The actual amount of federal tax (not even going to try to go into state and local income taxes or sales/use taxes) each of us would end up owing on our reported taxable gains would be dependent on what tax bracket we each end up in on our respective federal income tax returns. And that would be further dependent on our filing status (married, single, etc.), and all the other taxable income and deductible expenses we report on those federal income tax returns.

Oh, and to just slightly complicate matters further, the amount of federal income tax we would owe on those gains can also vary depending on whether or not the cards we traded were held by us as dealers, investors, or true collectors/hobbyists. If either of us held the cards we traded as collectors or investors, the resulting gains from our trades would be considered capital gains. And then depending on how long we had owned and held the cards before we traded, those could end up being either long-term capital gains or short term capital gains. The difference being that if we had held and owned the cards we traded for less than a year, our gains would be considered short-term taxable gains, and the resulting taxable income treated as ordinary income (like W-2 wages) and taxed at up to the highest marginal tax rate there is for individuals. In my example we both held the cards we traded for over a year, so those would both be considered long-term taxable gains, where the maximum federal tax rate either of us would pay on those LT gains would be capped at no more than 28%, because we were dealing in what are considered collectibles.

Now if either of us was a dealer and the card we traded was part of our inventory, that's a whole other story. The gain we had on the trade is no longer capital gain, it is all ordinary income, subject to federal income tax up to the highest tax rate there is for whatever basis we file a tax return under. By this I mean that if either of us did the trade as a dealer, our business could be set up to where instead of reporting our resultant taxable gains directly on an Individual federal income tax return (Form 1040), our business/dealership might be set up to where the taxable gain on the trade gets initially reported on a Partnership (Form 1065), Corporation (Form 1120), or S-Corporation (Form 1120-S) federal tax return. Not even going to try to start explaining all the differences initially having to file and report the taxable gain from our trade on one of these other returns would entail.

There is a positive thing if either of us do end up reporting such a transaction as a dealer though, and that is that we would also get to additionally deduct the expenses of running our business/dealership though our tax returns (utilities, rent, supplies, R&M, etc.), and thereby further reduce the amount of taxable gain we would otherwise have to pay income tax on if we reported the trade as an investor or collector/hobbyist instead. But there's also a potential downside in reporting as a dealer because as a dealer, you may also be liable for self-employment tax (social security and Medicare tax) of up to 15.3% on your reported taxable income/gain from this trade. And that is on top of whatever federal income tax you may owe on that income. And the self-employment tax would normally kick in and be applicable if you initially filed and reported the income from such a trade on an Individual or Partnership tax return (Forms 1040 and 1065), but not if you if you initially filed and reported it on a Corporation or S-Corporation tax return (Forms 1120 and 1120).

So there is the "short", but at least fairly complete, answer to your comment/question. (Believe me, it can get even more involved and complicated than this.) And this demonstrates exactly why no one ever wants to report their trades on their tax returns, it can be one huge pain in the butt. But this is generally what you are supposed to do, even when just trading cards with no cash involved.

And for those posting about how dealers always seem to try and take advantage of you in trades, I'm not defending anybody, but part of their reasoning for maybe doing that is they are more likely to actually report such activity on their tax returns (or at least on the subsequent sales of cards you traded to them), and that they may also then owe additional self-employment tax on top of regular income taxes as well. And since some individual just trading with a dealer isn't likely going to report that trade for tax purposes, they aren't going to worry or think for a second about how to come up with the cash to then pay the resulting tax(es) due. This is another potential downside of doing trades with no cash involved. You can end up generating what I call phantom taxable income, but generate no cash from the deal with which to pay the taxes now due.

And finally, if nothing else, this may give someone reading all this a little more understanding and appreciation for their accountant/tax preparer when they just dump all their tax info on them a few days before the filing deadline every year.

[BobC]

Originally Posted by Exhibitman

Bob, How do you value items that are unique or that have few known examples that haven't sold in a long time? I certainly can't rely on a single 2011 sale as a comparable. So I analogize to similar cards, but there is always that unknowable variable that only an auction result can establish. Case in point: someone recently tried to work with me on a rare card I had, but no matter what we tried we simply could not agree on a base value because the card never sells. I had a list of cards I thought were comparable but he disagreed. Ultimately, I was pleased to keep the card.

Adam,

You've hit on another huge obstacle when trying to report trades for tax purposes, what is something you got in trade actually worth? A huge part of the pain in the butt you sometimes have to deal with, and another big reason why most people don't report trades on their tax returns. There is no definitive answer in the tax code for this specific question/issue either.

In looking at other tax areas involving estimated FMV for possible guidance, if you donate property (clothing furniture, etc.) with no recognized FMV to charity, you would estimate and include that supposed FMV on your tax return for charitable deduction purposes. However, if for any single item you donate you claim a FMV of $5,000 or more, your are required to obtain a formal appraisal of the item being donated, in writing, by a qualified and licensed appraiser, or risk having the amount of your charitable contribution thrown out, or at least revised downward, by the IRS. This might be a reasonable way to determine what to do if reporting FMV of a card you trade for. If under $5,000, do your best guesstimate as to the FMV, and keep your notes and any evidence you used to come up with that FMV as part of your tax records. But for something worth over $5,000, you definitely try to get as much written corroborative evidence as possible, and maybe even try to find a third party appraiser, or other known "expert" in regards to card values, to offer up some written report to further substantiate your reported value.

Bottom line is, if your tax return included a trade transaction, the IRS would first have to pull your return for examination and audit before you'd need to provide them with anything. And the percentage of tax returns being audited annually is extremely small in recent years. Secondly, if you are unlucky enough to have your tax return pulled for audit, chances are the IRS agent you get assigned will likely know nothing about cards and their values, and they probably won't want to learn anything about them and bother with it either. So in all likelihood, if you can intelligently argue and show you made a reasonable estimate of a card's FMV, the agent will probably just sign off on whatever value you used on your return. Of course, you could also get assigned a real gung-ho agent who makes you go a lot farther to prove your estimate is correct, and thus the reason to compile and gather as much evidence as you can at the time you prepare your tax return, and retain it in case it becomes needed in future years.

Answers to tax questions aren't always simple black or white answers, but are very often multiple shades of gray.

[MVSNYC]

"Trading is the most fun part of the hobby to me. I do tons of trades with my collecting buddies."

I'm with Luke...I do a ton of trades, with many members here (Hi Luke); most are top T206 collectors...and quite frankly some big cards are often involved.

[Belfast1933]

For me, it’s an easy explanation why I haven’t made any trades here… it’s simply twice as hard as simply buying (or selling) for cash

For a trade to work, there are 2 transactions in play simultaneously - first, the value of the card I want and, at the same time, the value of the card I will give up. And then there is all the squishy, messy stuff in between those 2 values

I prefer the simplify of a straight purchase or a straight sale… it’s almost like a trade, in a way. But it involves 3 parties instead of two.

[nineunder71]

I also do a ton of trades, and mostly with members here on N54.

As I purchase condition upgrades or back upgrades for the PC, typically something becomes a duplicate and that heads to the trade pile. I usually look for trades long before I decide to post to the BST with a price tag.

Also, I don’t at all mind ‘loosing’ a bit in the trade, value wise, to not have to come out of pocket any cash. Oh, and this is a good way to start making some friends, ie- trade buddies for life! I value building my collection more than I care about $10 and $20 here and there. If I need your $80 card, I will happily trade one of my $100 trade cards for it. Same deal $800 vs. $1000

To the OP, my advise; Leave the comps out of the negotiations all together when trying to trade. You know what you value the Cobb at, and the person on the other end of the trade knows how they value the same card. If either party feels the need to look up comps to feel better educated then so be it, but leave that part out of the negotiations.

I use a ‘value range’ instead. You like my Ruth, I value him at $2000-$2500, what value range do you see your Cobb in??

This is how I would start a trade. Then, I can decide if the range you provide is something that I could work a trade around, or I can just move on..

Bickering about what a different card (comp) sold for, seems like a waste of time to me... Best of Luck

[Leon]

Originally Posted by nineunder71

I also do a ton of trades, and mostly with members here on N54.

As I purchase condition upgrades or back upgrades for the PC, typically something becomes a duplicate and that heads to the trade pile. I usually look for trades long before I decide to post to the BST with a price tag.

Also, I don’t at all mind ‘loosing’ a bit in the trade, value wise, to not have to come out of pocket any cash. Oh, and this is a good way to start making some friends, ie- trade buddies for life! I value building my collection more than I care about $10 and $20 here and there. If I need your $80 card, I will happily trade one of my $100 trade cards for it. Same deal $800 vs. $1000

To the OP, my advise; Leave the comps out of the negotiations all together when trying to trade. You know what you value the Cobb at, and the person on the other end of the trade knows how they value the same card. If either party feels the need to look up comps to feel better educated then so be it, but leave that part out of the negotiations.

I use a ‘value range’ instead. You like my Ruth, I value him at $2000-$2500, what value range do you see your Cobb in??

This is how I would start a trade. Then, I can decide if the range you provide is something that I could work a trade around, or I can just move on..

Bickering about what a different card (comp) sold for, seems like a waste of time to me... Best of Luck

There was no bickering in our attempted trade. Our valuations were just off. It wasn't a big deal and still fun to try.
.

[BobC]

Originally Posted by ValKehl

Bob, this seems totally contradictory to me if one is a cash-basis taxpayer for income tax purposes, which I believe most individuals are.

Hi Val,

The IRS views businesses and people as keeping their records in one of two acceptable manners, either on an "accrual basis" or a "cash basis". Both of these refer to when a taxpayer, an individual or business, recognizes income or expenses for tax purposes. If you are on the "accrual basis", income or expense is recognized when a taxpayer becomes liable for the receipt or payment of some bill or invoice. If on the "cash basis", it is recognized when actually paid or received.

A company/individual selling cards that is on the accrual basis for tax purposes sends cards and an invoice to a customer dated today, 12/26/2021, and the customer receives it and sends payment back to the company/ individual on 1/5/2022. Because the seller is on the accrual basis, they recognize the sale of those cards on 12/25/2021 as taxable income in 2021 (assuming the company/individual uses the calendar year as its taxable year), even though they didn't receive payment of their invoice till the following taxable year. Had the seller been on the cash basis instead, they wouldn't recognize the income from the sale until the following year, 2022, when the payment was actually received.

The term "cash basis" itself refers to the timing of when a taxpayer recognizes income and expenses for income tax purposes, it does not necessarily refer to or just mean actual cash paid or received.

Now take the card selling company/individual in my example. Instead of being paid in cash for the cards they sold, they could agree to be paid in goods or services instead. And by goods, that includes cards they received as payment for the cards they just sold. You, or others, may call that a trade, but the IRS calls it a taxable sale or exchange. It doesn't matter if it is individuals or companies involved in such a deal/trade, it is still considered a taxable exchange to both parties by the IRS. There is also the possibility that some people think such a trade isn't taxable because it is considered as a like-kind exchange, where the tax liability is deferred, but under current tax law, like-kind exchanges only apply to real estate.

The parties (usually individuals) in a card trade don't normally have either side reporting the trade to the IRS, so the IRS normally has no other way to know about such activities, and doesn't really have the time or resources to go after these people. But that doesn't mean you're still not supposed to report such trades as taxable sales on your income tax returns. It is kind of similar to how people that win something from an AH that doesn't charge them sales tax for the state they're in normally don't bother to voluntarily report and pay the resulting sales/use to their state, like they're supposed to. People know that in either instance, the chances of them getting caught is almost nil, so they don't bother.

As you said, pretty much all individuals are considered "cash basis" taxpayers, and generally only actual registered businesses can get treated as either "cash basis" or "accrual basis". And for the record, when someone does execute a taxable trade of one card for another, if no cash is involved, you are supposed to assume that the current FMV of the card you received at the time of the trade is equal to the amount of cash you would have received had you just sold the card outright. And you use that FMV to report the deemed sale on your tax return, and to then figure any gain or loss you may have for tax purposes.

[Piratedogcardshows]

I have pulled some trades off as recently as this year on the site. I always enjoy trading and have benefited and been on the lesser side. Yin and yang.

[Bram99]

The problem that has been described here is ancient. In fact, it gave rise to the concept of money as a medium of exchange. It can be substituted for very diverse goods.

The first known form of currency was the Mesopotamian Shekel from around 5,000 years ago. Likely there were similar quibbles to the one in this thread, when a wheat farmer had too much wheat but really wanted some goat milk.

Today, it can be used as a medium of exchange (to buy or sell) a PSA 3 T206 Ty Cobb with poor centering. The money proceeds from a sale like this could be used to buy a different T206 Ty Cobb graded by a different TPG. Or it can be used to even out a trade involving the two cards in the example.

The key issue in any of these examples is the need to come to an agreement on relative value. That problem is also ancient and didn't arise with the advent of price guides, the rise of card "investors" or card dealers, or third party grading.

So if you can't think of a fair trade, try using cash to help even things out! If that doesn't work, you probably weren't likely to have a meeting of the minds in a buy/sell transaction either, so might as well move on and find a new trading partner!

[LincolnVT]

This thread brings me back to the hobby in the late 80s when nothing was graded, very little was sold, everyone traded and we all relied on the latest issue of Beckett to see if our Billy Ripken variation still had a little black arrow pointing up next to the $50.00 price. Back then if you had a decent Mantle from the 50s or 60s you were king...nobody cared about the stuff that we all chase today. I love to trade still...would still much rather work a trade deal with a collector than sell what I have just to buy another piece at auction.

[Yoda]

Way back, trading was the heart and soul of the hobby, kids had no money and trading was was really the only way to get desired cards after meagre allowances were exhausted. I got my first Mantle Bowman rookie through a trade. I was 7 years old at the time.

[ValKehl]

Bob, I was 99.9% certain that after I commented about cash-basis taxpayers, you would respond with a dissertation re cash basis vs. accrual basis, and I wasn't disappointed.

Although my comment may come across as "snarky," I truly appreciate and respect your immense knowledge of taxation and the governmental regulations pertaining thereto. While an accountant for most of my career, I never got much into taxes, so I only know enough about taxes to be "dangerous." Hence, I also truly appreciate your many efforts enlighten all of us with your tax knowledge. And, I enjoy reading whatever you post re any topic because of you excellent writing skill.

You mentioned that, "there is also the possibility that some people think such a trade isn't taxable because it is considered as a like-kind exchange, where the tax liability is deferred, but under current tax law, like-kind exchanges only apply to real estate." I resemble your remark in that I never realized that a cashless trade is taxable. I guess the real property lobby has been a much stronger influencer on Congress than the personal property lobby (if there even is such an organization).

[BobC]

Originally Posted by ValKehl

Bob, I was 99.9% certain that after I commented about cash-basis taxpayers, you would respond with a dissertation re cash basis vs. accrual basis, and I wasn't disappointed.

Although my comment may come across as "snarky," I truly appreciate and respect your immense knowledge of taxation and the governmental regulations pertaining thereto. While an accountant for most of my career, I never got much into taxes, so I only know enough about taxes to be "dangerous." Hence, I also truly appreciate your many efforts enlighten all of us with your tax knowledge. And, I enjoy reading whatever you post re any topic because of you excellent writing skill.

You mentioned that, "there is also the possibility that some people think such a trade isn't taxable because it is considered as a like-kind exchange, where the tax liability is deferred, but under current tax law, like-kind exchanges only apply to real estate." I resemble your remark in that I never realized that a cashless trade is taxable. I guess the real property lobby has been a much stronger influencer on Congress than the personal property lobby (if there even is such an organization).

Val, LOL I never take anything you say as snarky. And I know I usually write too much in responses like that, but as you know, when it comes to taxes the easy, quick answers often leave out very important points and details.

Very often when someone asks a tax related question on the forum relating to our hobby, I see a lot of partial, or even misguided and incorrect, responses that someone that doesn't know better puts out there for all to see, even though their intentions are well meaning and/or they truly thought they knew the correct answer. I just don't want to see someone reading another person's well meaning, but incorrect responses, and then use such not entirely correct info to make some potentially bad decisions tax-wise, in regards to the hobby and their collections.

I certainly don't know everything when it comes to taxes, but as a practicing CPA/accountant for over 40 years, I hope by now I know a little more than the average person. LOL And don't ever feel bad that even though you worked as an accountant in your career that you never really got into the tax side of things. I've had CPAs that I did income taxes for because they never got into into the tax side of the profession. Heck, when I first got out of college I went to work for one of the old Big Eight firms, Peat, Marwick, Mitchell & Co. (they are now called KPMG and still going strong) in their Cleveland office, and we used to joke about how it seemed none of the audit partners in the firm could even do their own taxes. A lot of people often think that someone who is a CPA/accountant automatically knows everything about income taxes, accounting, auditing, estates, business consulting, and so on, and don't realize the extent and degree of specialization that actually occurs in the profession.

I always figure that even if just a single person reading one of my "dissertations" gets some useful and helpful tax or business info out of it, then it was worthwhile. And occasionally people have PM'd me on different tax/business issues and topics I've brought up in my posts, and in a few rare instances I've even followed up with a few inquiring people via phone for additional guidance. Talking is a lot faster and easier than always having to type everything out, believe me. LOL Hopefully you (and everyone else) now know a little something more about how trades are at least supposed to be handled for tax purposes.

Anyway, happy holidays and happy New Year to you and yours!