If you’re buying and selling collectibles a regular basis, knowing some basic tax rules and regulations is a good idea.
Collectors and dealers of sports cards, sports memorabilia and other collectibles need to be aware of the tax implications of their pursuit whether it is a hobby or run as a business. Even if you are just selling a few sports cards on eBay and make a profit doing so, it does count as income for tax purposes. Likewise, if your trading activities result in a net loss, you will be eligible to apply that to your tax liability as well.
It is important to record all of the expenses associated with your buying and selling collectible activities. Keep track of even those that you aren’t sure of, because as long as you keep good documentation you may be able to deduct at least a portion of the expense. Just keep in mind that the definition of what is an acceptable deduction is “ordinary and necessary” for collecting and trading in sports cards and collectibles.
Federal income tax implications
According to the IRS Topic 409, collectibles are considered for tax purposes as a capital asset and depending on how long you hold them before selling will determines the tax rate. Short-term capital gains rates are up to 35% and you will be in that category for any profits on the sale unless you have held the collectible for more than a year. By retaining the asset for over a year you qualify for the long-term collectible capital gains rate of 28%.
Schedule D of Form 1040 is where you will record your trading gains and losses for disclosure to the IRS. Subtract from the sales price the initial purchase price. Then add up all of the other expenses you have incurred and place that figure in the cost basis column. Subtract the cost basis as well to end up with your loss or gain on the transaction.
For overall trading activities which end up totaling a loss for the year, there is a limit on how much capital loss you can declare. If your losses exceed the maximum allowable, it is possible to carry over the amount that is unused to the next year.
State income tax implications
Your capital gains on the sale of collectibles are also considered taxable income for state income tax purposes. Most states don’t have a different tax rate for capital gains and it is added as ordinary income for calculating state income tax.
Collectibles and IRAs
Even if you have a self-directed IRA, the IRS does not allow investments in collectibles to qualify. You might find yourself penalized and paying an early-distribution penalty of 10%. So using IRA funds to trade in collectibles is a poor strategy from a tax point of view.
IRS Publication 535, Business Expenses, is the official word on calculating expenses for trading. It is vague however and expenses can be hard to determine as to whether they are necessary and legitimate.
Expenses that are obviously necessary such as advertising, booth rental at a card show, mileage to go to card shows etc. can be easily justified. But what if you take a vacation and buy some sports memorabilia or other collectibles? Can you take the whole trip cost as an expense? Generally not, but you can calculate a reasonable portion of the cost as a business expense.
If you are selling collectibles online for example, you may be able to deduct a portion of your internet connectivity expenses. If you are using your computer and internet connection exclusively for your collectibles trading activities, then you could amortize the computer and deduct your monthly internet expenses completely.
Tax consequences for collectible swaps
Collectibles like baseball cards and sports memorabilia are considered like-kind property and can be exchanged on a tax-free basis. You are safest making a swap such as baseball cards for baseball cards.
Tax considerations for dealers
A dealer in baseball cards and sports memorabilia will be responsible for business licensing and collecting sales tax just like an antiques dealer or similar business. The structure you select to operate can be a sole proprietorship, partnership, limited liability company or a corporation. And each of these business organization forms will impact your tax strategy and personal liability exposure.