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Collecting Taxes

Matt C. White

WHEN A FRIEND TOLD me about his newfound interest in buying and selling sports trading cards, it reminded me of the joy that collecting brought me in my childhood. And when he asked me to explain the relevant taxation, it got me thinking: The core of the tax code is more logical than we give it credit for. It’s the ever-changing details that make it squirrelly.

If you buy and sell collectibles—whether it be sports cards, coins or antiques—the tax code assigns your activity to one of three tracks:

  • Hobby
  • Investment
  • Business

What factors determine the tax track you should follow? It’s a question worth considering, but don’t overcomplicate it. Instead, try some simple self-reflection. Why are you engaging in the activity? Hobbyists are doing it for fun, investors are holding assets for appreciation and businesses are spending money to make money.

As a kid, I couldn’t get enough of sports trading cards and memorabilia, including Starting Lineup figures, autographs and pennants. Next to playing sports, nothing brought me more hours of fun.

Sure, I was intrigued by the possibility that these things might be worth something someday, but that wasn’t why I did it. I collected because it made me feel like I had VIP access to the players I looked up to—like I belonged to an exclusive club. I knew that, even if I never made a dime from selling my treasures, it would make no difference to me.

In other words, I was a hobbyist. But even hobbyists occasionally decide to part with a prized possession for the right price. This gain—like any realized gain in the tax code—is taxable income.

I remember a handful of times when I sold a card for what felt like a fortune. Those sales were taxable capital gains, but I never had enough income in one year to trigger an income tax filing requirement. I think $200 was my record sale. That’s typical for hobbyists’ gains: They’re usually small and infrequent.

But while their gains are taxable, hobbyists’ losses aren’t deductible, and I’m fine with that. From the government’s perspective, an allowed tax deduction is an expense. I don’t want Congress spending tax dollars to subsidize hobbies—not mine or anyone else’s.

Skip over to the next track—investment—and you’ll find that investors have the same capital gains treatment as hobbyists. But unlike them, investors can deduct capital losses. How can you prove that an activity is an investment instead of a hobby? If you had the foresight to keep adequate records to supply your tax cost basis to support a capital loss, that’s a good sign that financial appreciation was your motive, and hence you’re an investor rather than a hobbyist.

But please don’t misunderstand: A regular investor is willing to sell at a loss for specific profit-motivated reasons. For example, he or she might want to free up capital for a better financial opportunity, or to rebalance a portfolio’s asset allocation. But if you’re just offloading your personal stuff, you probably aren’t creating capital losses, even if you have pristine records. No, in that case, you’re more likely a hobbyist who’s decluttering.

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Think about it: Do we really want the tax system turning yard sales into tax-loss harvesting opportunities? I don’t. If you want a tax break for cleaning out your closet, that’s what the noncash charitable deduction is for. You can donate to a charitable thrift store, like AMVETS, and create a deduction for the fair market value—the price the thrift store might charge for your things.

I still enjoy reminiscing over my old collection from time to time. Even though I’ve been a hobbyist, there’s no reason why I couldn’t try my hand as a collectibles investor today—now that I have more capital to work with than I did as a kid.

Maybe I’ll reallocate a portion of my investment portfolio and buy a few special cards for their appreciation potential. But what if I then spot an even better card, one that I just know is poised to shoot the moon? Maybe I would sell some of my investment cards to free up the capital to make the new investment, perhaps doing so at a loss. A capital loss supported by good records and reasonable facts would be pretty hard to argue against.

The third track—business—shifts to an entirely different tax regime. No more capital gains or losses. Sales proceeds become revenue, cards become inventory, and every business-related expense becomes deductible in the determination of net taxable business income.

My old card shop hangouts were easy to spot. They had a sign, a front door and people standing behind a glass display case, eager to swap stories about rookie cards and complete sets. By contrast, today a collectibles business might look like a guy with a computer—like my friend.

This is the tax track his collectibles activity took. He was implementing a plan—researching the market, locating undervalued cards he could buy, and reselling them for a profit. He was starting a collectibles business.

Now for the squirrelly details.

Collectors incur expenses like storage supplies, grading services and subscriptions. In the past, hobbyists could deduct these, but only up to the amount of hobby income. Investors could deduct them regardless of investment income. And both got the benefit only if they itemized instead of taking the standard deduction. Even then, the amount of the deduction had to exceed another hurdle to make a difference—2% of adjusted gross income. But just to complicate things further, the law changed starting in 2018, and this deduction no longer exists, at least through 2025.

There’s a separate long-term capital gains rate for collectibles of 28%. That’s not as favorable as the regular long-term capital gains rates of 0%, 15% or 20%, depending on your tax bracket. But unlike standard long-term capital gains rates, the 28% collectibles rate is a cap. If your marginal, ordinary tax rate is less than 28%, then that’s also the rate you pay on long-term sales of collectibles. This is an often-misunderstood nuance.

And of course, if you’re a business, there’s a host of other tax considerations—many of them influenced by factors such as your choice of business entity, whether you have employees and your home state.

These squirrelly details are the bane of accountants—but also their job security. You’ll know you’ve found a good one when you’re guided with the kind of healthy tax thinking that maps the economic reality of your activity to the principles of the tax code, and prepares you to make informed decisions on future activities.

Matt Christopher White is a CPA and CFP® who writes about money and apprenticeship to Jesus. You can get his book “How to Love Money: Four Paradoxes that Breathe Life Into Your Finances” at MattChristopherWhite.com. Follow Matt on Twitter @WriteMattWhite. His previous articles were Christmas All Year and When Fantasy Fails.

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Chazooo
Chazooo
4 months ago

Don’t you just love the Gummit? They toss around billions and now trillions of taxpayer dollars at all kinds of boondoggles and Elite friends but are homing in on the eBayers and Flea Market folks, aka “Irredeemables” and “Clingers” mostly to discourage the activity with suffocating paperwork rather than puny revenue gains. Fear not, the digital currency being fine-tuned by China will solve that problem for the tax payers and tax collectors when it is activated.

William Perry
William Perry
4 months ago

Here is a link to an article which may address your questions. https://www.thetaxadviser.com/issues/2019/nov/taxation-collectibles.html

Andrew Forsythe
Andrew Forsythe
4 months ago
Reply to  William Perry

William, thanks for the link. I confess I haven’t read the article line-by-line yet but I took a quick look. As I mentioned, virtually all of what I buy and sell I don’t believe would be considered a “collectible”, although I see that the IRS has a lot of latitude in so designating.

The article makes clear what a complicated and nuanced tax area this is, and that’s a large part of the problem. There are countless casual collectors/sellers/ebayers, like me, who are truly hoping for a simpler way to handle the tax aspects of this. I’ve written my congressman and senators and I’m truly hoping a legislative fix is forthcoming.

Andrew Forsythe
Andrew Forsythe
4 months ago

Matt, thanks for the article and your timing is excellent. I recently learned of the tax law changes which, beginning in 2022, require payment processors such as PayPal and ebay to send account holders (and the IRS) 1099-K forms if their total annual receipts are at least $600 (down from the prior minimum of $20,000!). This has lots of hobbyists who do some buying and selling quite worked up, not to mention ebay, which is asking its members to write to Congress: Form 1099-K | eBay I realize that this is simply a change in reporting procedure, not a change regarding what constitutes taxable income, but it’s still raised a lot of questions.

For example, I collect pocket knives and in the course of that also sell a number of them each year. I do this for fun, not as a business or for investment, so I guess I’m a hobbyist. Moreover, most of the knives I sell are garden variety production models and I can’t see them being classed as “collectibles”.

So how do folks like me—and the thousands of ebayers and others who make a few sales each year— report this on our tax returns? I know that hobby expenses are no longer deductible, but is the original price I paid for a knife an “expense” or the basis of a capital asset which I can subtract from the sale proceeds to determine if I have a profit or loss? And if the latter, can I also add to my (adjusted) basis the costs of selling—PayPal fees, shipping, etc.? Where on the 1040 do I report all this? And must I pay capital gains tax on any knives I sell for a profit without being able to offset those with the majority which I sell for a loss?

I’ve done my best to comb through the IRS webpages and publications dealing with “hobby sales” and haven’t seen the answers to my questions.

Many thanks for any insights you may have.

Matt Christopher White
Matt Christopher White
4 months ago

Andrew, it sounds like the knives you are selling would not be considered collectibles but regular capital assets. This just means the special collectibles gains rate is out of the picture, but the other considerations in the article are still pertinent. Many hobbyist Ebayers sell their things for less than cost which means those are nondeductible capital losses. When you don’t have a 1099 for the sales proceeds, there is no need to report a nondeductible capital loss. If you do have a 1099, you would want to report a sale that matches the sales proceeds on the 1099. Sales of capital assets go on Form 8949 and are summarized on Schedule D. Yes, what you pay for the asset is your tax cost basis. You have a gain only to the extent sales proceeds exceed tax cost basis. Remember, you only get the favorable long-term capital gains rate if you’ve held the asset for a year before selling. The costs of selling can be netted against the sales proceeds or entered as a separate adjustment to reduce the gain on Form 8949 column (g) with a code “e” entered in column (f). Remember, if you have a 1099, reported sales proceeds should match the 1099. If the 1099 reports sales proceeds that are already net of selling expenses, then you don’t need to make an adjustment in column (g) because you don’t want to double count the selling expenses. It is true that hobbyists’ losses can’t be deducted and thus can’t be netted against hobbyists’ gains. If you want to deduct losses, you will have to find your way over to the investment or business track. I’m so glad the article came at a good time for you. Thanks for reading!

Ormode
Ormode
4 months ago

If you have a loss, and you are a private individual selling personal property for less than you paid, don’t you have to put an L in column F and then back out the loss with a positive amount in column G? This would come up, for example, if you sold a used car through eBay Motors.

Matt Christopher White
Matt Christopher White
4 months ago
Reply to  Ormode

That’s right, Ormode. When you report a nondeductible loss on Form 8949, that adjustment in column (g) with a code L in column (f) is the mechanism you use to prevent the deduction from flowing through to Sch D on the tax return.

Andrew Forsythe
Andrew Forsythe
4 months ago

Matt,

Thank you kindly for your detailed reply. Sounds like, for a case like mine, you simply treat these “hobby sales” as normal capital gain/loss transactions, using Sched. D and Form 8949—except that if you show an overall loss, you can’t use it to offset other gains as you would with a typical capital loss.

I’m further assuming from your answer that I could group my “hobby knife sales” on Form 8949, so that, as long as they collectively resulted in a loss, I wouldn’t have any gain to pay tax on.

Last edited 4 months ago by Andrew Forsythe
Matt Christopher White
Matt Christopher White
4 months ago

Andrew, you are welcome. To clarify, the gain or loss is calculated separately for each sale. A loss on a hobby sale is nondeductible and can’t net against a gain on a hobby sale. But remember, you are not entirely stuck with no options here. There’s a good reason that losses on hobby sales aren’t deductible. If they were deductible, every yard sale would produce capital losses in the thousands. Hobby sale gains and losses are typically, relatively small and infrequent. If you are running a more significant buying and selling operation and it feels like the economic reality of your activity doesn’t match up well with the hobby track of the tax code, then let that be an indicator that you need to think back through the principles and consider if your activity is more appropriately on the investment or business tax track. It is helpful to remember that enjoying the activity does not preclude you from being an investor or business.

Andrew Forsythe
Andrew Forsythe
4 months ago

Matt, thanks again—your clarification is very helpful.

The tax code situation, though, seems like a “heads you win, tails I lose” proposition. If I have a gain on a sale, I pay tax. If on the next sale I have a loss, I can’t use it as an offset.

I will keep your advice in mind as to the investor or business tracks.

Rick Connor
Rick Connor
4 months ago

Matt, thanks for the great explanation of a confusing part of the tax code. Does this apply to NFT’s? Are they considered collectibles?

Matt Christopher White
Matt Christopher White
4 months ago
Reply to  Rick Connor

Rick, you’re welcome, and thank you for your kind words! There are no tax regulations specifically addressing the classification of NFTs yet but the prevailing thought is that the NFTs that represent collectibles-type assets, like works of art or trading cards, would also be taxed like the physical collectibles counterparts. But there could be other types of NFTs that might not be taxed like collectibles, such as NFTs that represent ownership of real estate. There are a lot of possibilities.

Last edited 4 months ago by Matt Christopher White

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