With the recent surge in interest in baseball cards and other sports cards and memorabilia, many more people have begun to recognize them as an alternative investment, like art, stamps and coins, antiques, etc.
Do you know who else does? State and federal governments. In short, yes, baseball cards are considered collectibles for tax purposes.
This article will look at what exactly is considered a collectible for tax purposes as well as possible ways to reduce the tax obligation on your baseball cards.
What Is Considered a Collectible For Tax Purposes?
How Is “Collectible” Defined?
This is where things can get tricky. Recall the old adage: “One man’s trash is another man’s treasure.” Just because one person decides to collect aluminum soda cans does not mean that they become collectibles.
To put it simply, a collectible is something that gains value due to scarcity and/or popular demand. Think of the simple economics of supply and demand: if there are many people who want an item, but there are very few of them, the price will be higher due to the competing demand.
Among the most popular collectibles are the following: rare stamps and coins, rare books, artwork, baseball cards, glassware, antiques, and fine wine.
Capital Gains Tax
Now, if you’re a collector intent on one day profiting from your collection, brace yourself: the capital gains tax on the sale of a collectible is 28%. Moreover, you might have to cough up a 3.8% net investment income tax, depending on your particular AGI (adjusted gross income).
Of course, for those in higher tax brackets, the 28% rate is actually less than the taxes they pay on ordinary income. So, in some ways, the tax on collectibles is more painful for those in brackets that pay less than 28%.
You might be wondering why collectibles are taxed so heavily. Well, in short, the government doesn’t exactly love the collectible industry, because they don’t see it as a real driver of economic growth.
Calculating Your Cost Basis
To understand your tax obligation for the sale of a collectible, you need to figure out your underlying basis. Follow this simple formula: cost of item + auction/broker fees = your cost basis. If applicable, you can apply maintenance and restoration costs to your “cost of item.”
For inheritance, which is fairly common with collectibles, the basis is the “fair market value” at the time of inheritance, and should be based on an official appraisal. Without an appraisal, the market value can be assessed by “comps,” i.e. the price of similar items.
Once you have your basis, subtract it from your sale price to get your net capital gain, or the amount that you will be taxed on.
For example, let’s say you buy a 1951 Bowman Mickey Mantle for $60,000 and sell it for $70,000. There were auction/broker fees of $1,000, so your formula is as follows:
- $60,000 + $1,000 = $61,000 (cost basis)
- $70,000 – $61,000 = $9,000 (net capital gain)
- $9,000 * 0.28 = $2,520 (total tax incurred)
- $9,000 – $2,520 = $6,480 (total profit)
You can see how quickly your profits dwindle after taxes come into play. So, you might be wondering what options you have, if any, to help reduce this tax burden?
Are There Options for Diminishing Tax Obligation on Collectibles?
Yes, although some of them can get tricky. Here’s an overview of some options you might consider.
One important thing to note is the amount of time that you possess the collectible before selling it. For transactions where the collectible has been owned for less than one year, it will be taxed just like ordinary income.
Why does this matter? Well, it depends. If your tax bracket is less than 28%, then this would result in paying less overall tax on the sale of your collectible.
If your tax bracket is more than 28%, however, this would be less advantageous compared to holding your item for more than one year (assuming the value holds steady or appreciates further).
Recognize Gain Over Multiple Years
One option is to structure the sale over multiple years so that the gain is not recognized all at once. This could be done by selling a portion of the collectible asset (if possible with the particular asset) each year.
For example, a collector could sell a portion of his collection of 1952 Topps cards toward the end of one year and then finish selling the rest at the beginning of the following year.
Can You Write off Baseball Cards?
A write-off is an accounting action that lowers the value of a given asset while debiting a liabilities account at the same time.
By donating the collectible to a qualified charity, taxpayers can claim a charitable deduction for the fair market value of said collectible. However, this is only possible if the charity is expected to use the collectible in its charitable function (e.g. a symphony using a violin that’s donated rather than selling a painting that it receives).
Did you know? There are many collectors that are still selling vintage card packs with bubble gum. This vintage baseball card bundle has card packs dated back to the late 80’s and early 90’s. If you are lucky, you might get a few packs containing bubble gum.
Selling Capital Loss Property
Taxpayers can offset their collectible gains during the year by selling some assets that have unrealized losses. This is similar to investing in stocks, where capital losses offset capital gains, thus lowering the overall net profit gains upon which tax is incurred.
When it comes to writing a will, it’s a good idea to assess the value of collectibles and whether they are more tax-efficient to hold or transfer prior to the individual’s death.
Gifting a collectible means that it is no longer in the person’s estate and therefore no longer incurs estate tax upon their death. The recipient, however, will typically take a carryover basis from the gift giver, resulting in more collectible gain when it’s sold as opposed to if it had been recognized as an inherited item.
If held until death, the collectible’s value must be included in the taxpayer’s estate. A large enough estate will be subject to estate tax. Either way, the person who inherits the collectible receives it at a fair market value basis.
The old saying goes that “The only thing certain in life is death and taxes.” Unfortunately, this applies to our beloved baseball cards. Although few people enjoy the technicalities of taxes, it’s important to take them into account when it comes to your collectibles.