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Hoping that someone knowledgeable about tax stuff might weigh in here, just crowdsourcing opinions. Please for the love of god don't tell me to consult a tax professional, I am very opposed to paying people to do my taxes (though I might try getting through to someone at the IRS by phone, I've gotten answers to tricky tax questions that way before.)
My husband collects stuff. Definitely "collectibles" for tax purposes. There are 3 possible designations for someone who buys and sells collectibles.
Dealer - It's a business. You'll have best luck holding that classification if you have a business plan and there may be self employment taxes involved, the whole shebang with your income minus expenses is taxable, blah blah. Probably the biggest recordkeeping hassle but the lowest tax liability. I don't think that this one applies.
Hobbyist - They eliminated the itemized deduction for hobby expenses, at this point all hobby income is just...taxable income. If you buy "collectibles" to feed your hobby primarily, then selling extra stuff could just be hobby income. Easiest for recordkeeping, but maybe the highest tax liability as you're paying tax on the full sale price with nothing subtracted, though capital gains rates won't apply necessarily...?
Investor - This is the designation that seems most accurate. We're talking coins, cards, comics, figures, art... And he did buy them with the intent of holding them in pristine condition to resell at a profit one day. This is where capital gains comes into play. Tax is computed on net sale price minus original cost basis of the item, with a rate that varies with short/long term. I get how capital gains works.
Here's the problem. Despite the fact that he did acquire these things as "investments" he did not understand how the taxes would work at the time, and he did not keep records of the purchases. Many of the purchases were decades ago, and he doesn't remember what he paid for stuff, and couldn't prove it if he did. Finding out the value of some of these things at that point in time isn't easy. He's been selling on Ebay, and they just announced that they are going to begin reporting sales over $600 in a year to the IRS and sending out a 1099-K. He's already over that, in selling stuff he has no idea the cost basis for, this year. Also, while we do know that he held the stuff for over a year, making it long term capital gains, we don't know the actual date of acquisition, not even the year for the most part. Can't really put down, "The 1980s we think?" on a tax form...
Would we have to report it as capital gains and if so, what on earth would we use for basis and dates? Can we just fall back to reporting it as hobby income on the full sales price knowing to keep better records in the future? This cannot possibly be that uncommon.
Please for the love of god don't tell me to consult a tax professional, I am very opposed to paying people to do my taxes (though I might try getting through to someone at the IRS by phone, I've gotten answers to tricky tax questions that way before.)
Free advice from random people on the Internet is worth every penny you pay for it. Being penny-wise can be pound foolish when it comes to the IRS. You often don't get a second chance to correct things.
I personally have seen so much wrong tax advice given out here ....I just went through this in a discussion this week .people run on what used to be and what they thought the laws were rather than look it up properly...
The biggest problem is they only look up a piece of the story on the irs site.
We had a discussion about making a 2nd home primary down the road and what happens to the capital gain exclusion.
Every person that commented sited the laws pertaining to it not being a second home first ..no one went any farther to look up what happens when you have non qualified use first which is in a different section .
I finally posted the section no one bothered to read.
You can avoid consulting a tax professional at your own peril. What you don't realize is the hidden benefit of such a professional is they spend all their daylight hours understanding and dealing with Uncle Sam on multiple fronts. And they are able to give insight based on experiences from their other clients.
My CPA has actually formed a mini investment group and we have shared knowledge and perspectives which ordinarily would be tough to get.
If there's exponential gain a zero cost basis won't matter much. Therefore the solution is not to sell for anything less than an exponential gain...
That's why I like Crypto. For what I plan to sell for, the cost basis makes zero difference in my taxable gain. If you're a trader or flipper then cost basis becomes very important and potentially the biggest Achilles heel depending on what asset you're trading/flipping.
If it were me, I would consider it a hobby. I never take deductions that I cannot document in full. The risk of being audited is much higher for these types of activities, too.
Hoping that someone knowledgeable about tax stuff might weigh in here, just crowdsourcing opinions. Please for the love of god don't tell me to consult a tax professional, I am very opposed to paying people to do my taxes (though I might try getting through to someone at the IRS by phone, I've gotten answers to tricky tax questions that way before.)
My husband collects stuff. Definitely "collectibles" for tax purposes. There are 3 possible designations for someone who buys and sells collectibles.
Dealer - It's a business. You'll have best luck holding that classification if you have a business plan and there may be self employment taxes involved, the whole shebang with your income minus expenses is taxable, blah blah. Probably the biggest recordkeeping hassle but the lowest tax liability. I don't think that this one applies.
Hobbyist - They eliminated the itemized deduction for hobby expenses, at this point all hobby income is just...taxable income. If you buy "collectibles" to feed your hobby primarily, then selling extra stuff could just be hobby income. Easiest for recordkeeping, but maybe the highest tax liability as you're paying tax on the full sale price with nothing subtracted, though capital gains rates won't apply necessarily...?
Investor - This is the designation that seems most accurate. We're talking coins, cards, comics, figures, art... And he did buy them with the intent of holding them in pristine condition to resell at a profit one day. This is where capital gains comes into play. Tax is computed on net sale price minus original cost basis of the item, with a rate that varies with short/long term. I get how capital gains works.
Here's the problem. Despite the fact that he did acquire these things as "investments" he did not understand how the taxes would work at the time, and he did not keep records of the purchases. Many of the purchases were decades ago, and he doesn't remember what he paid for stuff, and couldn't prove it if he did. Finding out the value of some of these things at that point in time isn't easy. He's been selling on Ebay, and they just announced that they are going to begin reporting sales over $600 in a year to the IRS and sending out a 1099-K. He's already over that, in selling stuff he has no idea the cost basis for, this year. Also, while we do know that he held the stuff for over a year, making it long term capital gains, we don't know the actual date of acquisition, not even the year for the most part. Can't really put down, "The 1980s we think?" on a tax form...
Would we have to report it as capital gains and if so, what on earth would we use for basis and dates? Can we just fall back to reporting it as hobby income on the full sales price knowing to keep better records in the future? This cannot possibly be that uncommon.
Where my fellow tax nerds at, what do you think??
I would simply write down in my own records what I believe to be the best guess as to what I paid for each item and what date I think I bought it, and that's how I would report it. Neither of those numbers (the price or date) are going to make much difference at all in the final outcome of what you owe in taxes for the following reasons:
1. The exact date won't matter since it only has to be greater than one year to be considered Long Term Capital Gain. So, it makes no difference if you bought it in 1982, 1985, 1990, or whatever. All of those dates are well past the one year qualifying criteria.
2. The exact price won't matter much either since it's likely to be only a few pennies on the dollar of sale price. In other words, if you sell an old comic book for $50, then it won't matter much if you paid 75 cents or $1.50 for the book in 1982 because essentially ALL of the selling price is long term capital gain.
So don't sweat the small stuff. What difference is it going to make if IRS disallows your claimed $1.50 cost of the comic book and instead allows nothing? Answer: It won't matter one d*mn bit. I don't think that IRS is going to take you to court to collect a grand total of $34.12 difference between what you alleged was the cost basis and what they allow as your cost basis on the sale of numerous comic books, baseball cards, or whatever.
I would simply write down in my own records what I believe to be the best guess as to what I paid for each item and what date I think I bought it, and that's how I would report it. Neither of those numbers (the price or date) are going to make much difference at all in the final outcome of what you owe in taxes for the following reasons:
1. The exact date won't matter since it only has to be greater than one year to be considered Long Term Capital Gain. So, it makes no difference if you bought it in 1982, 1985, 1990, or whatever. All of those dates are well past the one year qualifying criteria.
2. The exact price won't matter much either since it's likely to be only a few pennies on the dollar of sale price. In other words, if you sell an old comic book for $50, then it won't matter much if you paid 75 cents or $1.50 for the book in 1982 because essentially ALL of the selling price is long term capital gain.
So don't sweat the small stuff. What difference is it going to make if IRS disallows your claimed $1.50 cost of the comic book and instead allows nothing? Answer: It won't matter one d*mn bit. I don't think that IRS is going to take you to court to collect a grand total of $34.12 difference between what you alleged was the cost basis and what they allow as your cost basis on the sale of numerous comic books, baseball cards, or whatever.
Thank you so much for discussing this in the way I hoped someone would!
I'm not really taking things said here as gospel, if I really worry about being unsure, I'll call the IRS. I actually got a guy on the phone there a few years back to walk me through a very complex situation involving tens of thousands of dollars (a US v. St.Clair filing if anyone knows what that is, it's a military thing.) It is not actually REQUIRED to pay a professional to deal with one's taxes. Honestly I view that as a question of time vs. money. Do I want to take my time to understand what I'm doing, or pay someone else to do so? And really I wish people understood that a.) You are generally still liable even if a paid pro makes a mistake. And they can. Especially your H&R Block types, I had people in my same college classes who had worked there for decades, they are not CPAs. And b.) The IRS is not a bunch of scary men in black suits and shades who will come break your legs and throw you in jail, even if you mess up. I've even owed them money and worked out payment arrangements with them before, they actually are not terrifying. I am not intimidated by taxes or the IRS.
The spirit of this is that I went to college for accounting, I've analyzed tax code for fun, I'm a nerd who is interested in this stuff, and I was hoping to hear other takes from other bean counter types, just because it's interesting stuff (to me.)
However, I am inclined to agree with the other poster who said that they don't claim anything that lowers their taxes owed, if they don't have any supporting documentation.
Since I posted this, I've been doing some digging on the subject. I have found that if you can establish a fair market value as of the point where you obtained an asset, then you can claim that as a basis...the only issue there, is how can you prove that you obtained it at that time? If you had the receipt, then you'd know what you paid! You are making the point that having paid $0.75 or $1.50 it doesn't make a huge difference (true!)...I go one step further and say that with basis that low, and no documentation, may as well claim zero and take no chances. Which one can do.
I do like to play it safe, so I think we'll just go ahead and pay taxes on the full sale proceeds of the stuff. He's retiring and his income will be going down this year anyways, I don't think it's going to be enough of a hit to really harm us, I don't think he's pulling in tens of thousands of dollars doing this. And I'll just have him start documenting his basis when he acquires collectibles, going forward.
This way, you're not paying someone to do your taxes. You're not even paying me to type. You're just giving me some wine to encourage me to type correctly and without any omissions.
What do you think?
Last edited by RationalExpectations; 03-27-2021 at 10:35 AM..
Thank you so much for discussing this in the way I hoped someone would!
I'm not really taking things said here as gospel, if I really worry about being unsure, I'll call the IRS. I actually got a guy on the phone there a few years back to walk me through a very complex situation involving tens of thousands of dollars (a US v. St.Clair filing if anyone knows what that is, it's a military thing.) It is not actually REQUIRED to pay a professional to deal with one's taxes. Honestly I view that as a question of time vs. money. Do I want to take my time to understand what I'm doing, or pay someone else to do so? And really I wish people understood that a.) You are generally still liable even if a paid pro makes a mistake. And they can. Especially your H&R Block types, I had people in my same college classes who had worked there for decades, they are not CPAs. And b.) The IRS is not a bunch of scary men in black suits and shades who will come break your legs and throw you in jail, even if you mess up. I've even owed them money and worked out payment arrangements with them before, they actually are not terrifying. I am not intimidated by taxes or the IRS.
The spirit of this is that I went to college for accounting, I've analyzed tax code for fun, I'm a nerd who is interested in this stuff, and I was hoping to hear other takes from other bean counter types, just because it's interesting stuff (to me.)
However, I am inclined to agree with the other poster who said that they don't claim anything that lowers their taxes owed, if they don't have any supporting documentation.
Since I posted this, I've been doing some digging on the subject. I have found that if you can establish a fair market value as of the point where you obtained an asset, then you can claim that as a basis...the only issue there, is how can you prove that you obtained it at that time? If you had the receipt, then you'd know what you paid! You are making the point that having paid $0.75 or $1.50 it doesn't make a huge difference (true!)...I go one step further and say that with basis that low, and no documentation, may as well claim zero and take no chances. Which one can do.
I do like to play it safe, so I think we'll just go ahead and pay taxes on the full sale proceeds of the stuff. He's retiring and his income will be going down this year anyways, I don't think it's going to be enough of a hit to really harm us, I don't think he's pulling in tens of thousands of dollars doing this. And I'll just have him start documenting his basis when he acquires collectibles, going forward.
That's correct. You COULD just claim your basis in the collectible as being ZERO and pay long term capital gains on the entire amount since it won't make a great deal of difference in what you owe. However, there's more than just some money involved. There's also some psychology and understanding of how bureaucracy works.
If for some reason the IRS decides to audit you, it's likely (IMO) that the auditor will try to justify his job by finding SOMETHING that you did wrong so that he/she can say that they collected some additional taxes for their efforts. That's known as job security and it helps when getting your annual review to have shown some positive collection results. If the boss keeps sending an employee out to do an IRS audit and they keep finding nothing, the auditor may be demoted or transferred to Timbuktu for his/her next assignment.
So, to properly play the game and help the auditor keep his job (and help you keep some of your own money), you need to leave them something to find to justify their job. PLUS, it may keep them from digging even deeper into other areas where the $$$ amounts are much more serious. I'm not implying that you would cheat or deliberately misstate anything on your taxes, but I wouldn't hesitate to take ANY small deduction that I thought I was entitled to even if I didn't have a receipt that was stamped, dated, and signed by a Notary Public attesting to my purchase in 1982.
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