Question about Capitial Gains Taxes on Collectibles.

[usmsci | 34]

As some of you might have seen, I had posted some pics of my WATA Super Mario Bros. that I had graded. 

you can find that here: 

I went to Comic Connect to sell this for me and I got an offer this afternoon. Obviously I don't want to give the government 28% of the sale for something that they had no hand in at all. When I collected a lot of these sealed games, I was collecting them to show them in my room much like the baseball cards of old, not to get rich. Back then (probably 2001ish?) most people were trading and selling as a mere hobby - no one had any idea certain games were going to be a fortune. That idea has only surfaced in the past 3 or 4 years. 

Assuming I accept an offer, that means going to the bank and depositing it... and then the bank has to report it to the IRS.

It looks like at the surface, the tax rate is 28% ,no matter what your taxable income is for the year, unlike other long term capital gains taxes. On the IRS website they say the 'maximum rate ' is 28%. They dont spell out a minimum. 

If the IRS does come calling - is there an option to tell them that this particular sale was based on a hobby and I am not in the business of making profit on Nintendo Sealed Games. What wiggle room is there as far as lowering or eliminated having to pay 28% on a 6-figure sale? 

Welcome all thoughts. Thanks! 

[RH | 4,924]

Nope. Welcome to the real world. Unpopular opinion around here but all taxes are theft.

Uncle Sam doesn't care how you gained the money. He just cares that you got it and thinks it's his right to take a piece of that pie.

Alternatively, now that I think about it, you could open an LLC, draw a "reasonable salary" and pay taxes that way. Might be cheaper, but a bigger hassle.

[usmsci | 34]

Is the IRS necessarily going to write a letter about it? i wonder how many people actually get IRS notices for depositing large checks? What is their normal process once the bank reports it? 

Does Comic Link/Comic Connect/Heritage report sales as well? I know Ebay does. 

Edited May 7, 2021 by usmsci

[usmsci | 34]

Actually I was looking into this a bit further and it looks like I would be taxed at my ordinary tax rate, which for me is 15%. 

The tax code has special treatment for collectibles, which can include artwork, rugs, antiques, gems, stamps, metals, coins, and alcoholic beverages, according to the IRS. When you sell collectibles, the special 0%, 15%, and 20% tax rates on long-term capital gains don't apply. Instead, you'll owe tax at your ordinary tax rate, with a cap of 28%.

Also this: 

The IRS will consider your hobby to be a business if you made a profit in three of the last five years.  While at one time you could deduct your hobby expenses from your hobby income, since 2018, hobby expenses are no longer deductible.

Well i definitely fall under the "hobby" category. Not sure that, being the case, if it would be reported as regular yearly income or capital gains. Perhaps theres some lawyers in here. (I have seen you all talking about crypto)

Edited May 7, 2021 by usmsci

[Gloves | 11,800]

13 minutes ago, usmsci said:

Perhaps theres some lawyers in here. (I have seen you all talking about crypto)

Just to be clear, while I totally enjoy the conversations around crypto on here, I'd not take any legal or financial advice from literally anybody here on this video game forum. We can chat and people can give you advice and you can take it or leave it of course, but my only ACTUAL suggestion would be to actually call an actual expert on the subject. Often you can get a free quick consultation call out of them, so at least giving that a go should be harmless.

[arch_8ngel | 1,597]

There is no way to legally avoid paying taxes on it. (as a US citizen -- other countries, you could potentially change venue and dodge taxes in some fashion)

If your marginal tax rate is going to be 15%, that is about the lowest practical tax rate you would ever pay on a large sale like this.  (though keep in mind, you'll also have state taxes, depending on where you live)

 

If you attempted to sell it through a business (as a sole prop), you're also going to owe self-employment taxes -- so for a one-off sale, unless the expenses of selling are very high, you're almost certainly best off selling it as a collectible with long term capital gains.

 

The biggest "problem" you're likely to run into is if you sell early in the year, but then end up owing taxes when you file next April.  You'll owe penalties and interest -- so make sure you take care of your quarterly tax withholding for the one-off sale.

 

If you're talking about mid-5-figures+ on the sale, and you aren't comfortable with sorting out the tax implications, tacking on the few hundred bucks to have a pro handle that year's taxes isn't really that big of a deal in the scheme of things.

Edited May 7, 2021 by arch_8ngel

[usmsci | 34]

@arch_8ngel thanks for the input. 

I am not selling it via a business and I live in a state with no state income tax. So thats a good thing. This is a 6-figure sale(or offer) that I have got. 

I will probably try to call up a CPA firm to see if I can get a free consult or talk over the phone. 

[DoctorEncore | 3,691]

Yeah, just put aside the money and plan to pay your dues come tax time. Don't try to game the system unless you're a multi-millionaire who can get away with that kind of stuff. A big tax mistake could haunt you for the rest of your life.

The good news is that even simple tax software like TurboTax or whatever you prefer should be able to easily calculate this for you. The only thing I'd be careful about is whether the sale also counts as income, thus bumping you into a higher tax bracket. Considering the nuances of things like that, I'd personally set aside money for the highest rate possible (28%).

Also, if you're one of the many, many Americans who overpays your taxes every year, your "refund" can be applied towards this collectible tax bill.

[arch_8ngel | 1,597]

21 minutes ago, usmsci said:

@arch_8ngel thanks for the input. 

I am not selling it via a business and I live in a state with no state income tax. So thats a good thing. This is a 6-figure sale(or offer) that I have got. 

I will probably try to call up a CPA firm to see if I can get a free consult or talk over the phone. 

If you have a 6 figure sale offer, your tax is going to be higher than 15%, because the sale is going to be marginal income on top of your current income.

So you'll fill up the 15% bucket, and then up from there. 

 

If you won't already -- this would be a good year to max out your 401k, since that shaves $19,500 off of the top of your income.

Similarly, if you have access to an HSA, be sure to fill it up to knock down your taxable gross.

 

But a 6-figure sale is WELL into "call a professional" territory, since even an expensive CPA ($500/hr) is cheap compared to screwing up and paying interest and penalties for not properly withholding income.

[arch_8ngel | 1,597]

17 minutes ago, DoctorEncore said:

Yeah, just put aside the money and plan to pay your dues come tax time.

No, you pay the taxes NOW as quarterly withholding -- otherwise you owe interest on failing to adequately withhold.

Turbotax (or other software) will handle quarterly estimates just fine, too -- so yes, a CPA isn't strictly required -- but if they didn't want to go it alone, losing 0.2% of their gain to professional help isn't the worst thing that could happen to them.

[usmsci | 34]

I work self-employed(sole proprietor)(so dont have company 401k or HSA but do have an IRA) and I have never paid quarterly, even though you are technically supposed to and never been fined or had to pay interest. I don't know why you say I am supposed to pay the gov't quarterly on sales. the IRS doesnt say anything about this. 

I dont know about Turbo Tax but I use credit karma for filing. I find that they are the best at making sure you get all that you are owed. 

Also, I am pretty sure long term capital gains are taxed separately and do not raise your ordinary income. Thats for short-term gains. (gains that you've held on to for less than a year). 

Edited May 8, 2021 by usmsci

[AdamW | 713]

3 hours ago, usmsci said:

Obviously I don't want to give the government 28% of the sale for something that they had no hand in at all.

Not to get too politics-y, but - I don't think that's really correct. You were able to travel to and from the store safely, yes? You almost certainly used government-funded infrastructure to do so. You were not set upon by violent thieves to relieve you of your extremely valuable possession, were you? You had a fairly strong expectation that the store owner would not just pull a gun and do the same thing? All of these are things that you may not really think about a lot, but they are things you have the luxury of not thinking about because there is a relatively well-functioning government around.

Even then, seeing tax as a direct payment for services rendered by the government isn't really...how it works. There are competing theories of who should be taxed and how much and why and on what philosophical grounds, but by this point there is at least an element of redistributive theory in all but the most regressive tax systems. In other words, the idea that the tax system should operate to some degree to transfer wealth from the most wealthy to the least. Especially where that wealth was not really earned by any direct form of labour, but was essentially a rent on someone else's productivity, or a sheer stroke of luck (like, well, getting a hold of an extremely valuable sealed video game for a cheap price).

tl;dr summary: you are getting something for your taxes, and it'll probably be better for your digestion to just pay 'em with a sunny smile than bellyache about the unfairness of it all.

[a3quit4s | 4,107]

Your best bet is to consult an accountant and those who try and evade Uncle Sam almost never win. 

[arch_8ngel | 1,597]

12 minutes ago, usmsci said:

I work self-employed(sole proprietor)(so dont have company 401k or HSA but do have an IRA) and I have never paid quarterly, even though you are technically supposed to and never been fined or had to pay interest. I don't know why you say I am supposed to pay the gov't quarterly on sales. the IRS doesnt say anything about this. 

I dont know about Turbo Tax but I use credit karma for filing. I find that they are the best at making sure you get all that you are owed. 

Also, I am pretty sure long term capital gains are taxed separately and do not raise your ordinary income. Thats for short-term gains. (gains that you've held on to for less than a year). 

This potentially changes things.

If you're self-employed -- talk to a CPA and see what they think about your ability to run the sale through your business so that you can max-out a solo-401k (lets you defer up to $57k, or so, between your contribution and "employer match").

Not saying that is definitely possible -- but worth asking a pro about, given how much you'll save from the 28% bracket with that amount of deferral.

 

And Long-term and short-term gains all stack up when determining your various brackets (they just have different tax rates within their respective brackets).

[usmsci | 34]

@AdamW

Not really true at all. I bought the Super Mario on Ebay 20 years ago. Had it delivered to my door by UPS. Stored it, wrapped up in the house ever since then. The only thing I am going to do to make the sale final is to drive to the post office and mail it and come back home. Also, I think most local roads are owned and operated by the State anyway. 

So the feds don't own the streets that I will use to go mail it, the internet provider I used to buy and eventually sell the game is owned by a private company and materials I used to store and keep the game in a cool place was bought at a private store. I won't even be mailing it USPS but through a private company like FedEx. 

So yeah - the federal government was not used in any way to facilitate the eventual sale of the game in any way. The idea that the government taxes stuff people buy and sell privately is ludicrous. 

Edited May 8, 2021 by usmsci

[Tanooki | 4,940]

I suppose the only way kind of above board you could avoid paying the taxes is getting paid in cash, and then over a period of years slowly start to deposit the amount into your bank account so it falls well under the radar of profitable sale so they can't sniff it out and have you pay taxes on your own stuff.  Not practical though really.  I suppose maybe if you knew how to put the money into an off shore account made in a country where US tax laws can't be applied as they refuse to report back would be another, but then they'd probably try and sniff out every other thing you do above board in country.

[usmsci | 34]

6 minutes ago, arch_8ngel said:

This potentially changes things.

If you're self-employed -- talk to a CPA and see what they think about your ability to run the sale through your business so that you can max-out a solo-401k (lets you defer up to $57k, or so, between your contribution and "employer match").

Not saying that is definitely possible -- but worth asking a pro about, given how much you'll save from the 28% bracket with that amount of deferral.

 

And Long-term and short-term gains all stack up when determining your various brackets (they just have different tax rates within their respective brackets).

I am pretty sure how the long term gains work is taxed after your ordinary income. So for example. If you are married Filing jointly and your Taxable Income (after all deduction, etc) is $80,800 or below (I think this is right for 2021). Then your long term capital gains tax is 0%. In that case I think I would free and clear. 

if someones taxable income is $100,000, you would be taxed at ordinary income levels then $100,000 - $80,800 = $19,200 would be the portion you would be taxed on for capital gains. Thats my understanding. I could be wrong. 

[usmsci | 34]

3 minutes ago, Tanooki said:

I suppose the only way kind of above board you could avoid paying the taxes is getting paid in cash, and then over a period of years slowly start to deposit the amount into your bank account so it falls well under the radar of profitable sale so they can't sniff it out and have you pay taxes on your own stuff.  Not practical though really.  I suppose maybe if you knew how to put the money into an off shore account made in a country where US tax laws can't be applied as they refuse to report back would be another, but then they'd probably try and sniff out every other thing you do above board in country.

Doesn't the bank just report it to the IRS so the feds can track you or make sure that the trail of money doesnt lead to smuggling drug money? I thought that was the only reason for it. I mean people with really good jobs deposit more than $10k per month in the bank just from employment (the magic number here is $10k for the bank to report by law). The IRS doesnt start writing them letters asking them where they are getting all this money. 

[Tanooki | 4,940]

Sure anything you deposit or someone deposits into your account is reported.  That's how they can keep tabs on stuff to prevent money laundering and other shady stuff.  That's why I said over years, and I meant many.  They won't think much of anyone throwing a few extra hundred in, random amounts really every month.  Maybe you won some lotto scratchers, friend gave you a gift, etc.  It's when you start throwing large sums in they take notice.  It's when you have something large and irregular pop up, it shows up on someones radar and they'll look and try and figure out why.

 

I mean decades ago it was popular just to take money and hide it, stuff it in a mattress, a weather proof box and bury it, whatever.  They had no trust in gov't stealing their earnings, and less trust than that in banks after all the decades of runs, crashes, and mishandling of funds.  So no one would think much of someone just pulling a little each month from your mattress fund really.

Edited May 8, 2021 by Tanooki

[Code Monkey | 2,011]

This is the reason decentralized finances exist, trade it for Bitcoin. Bitcoin is a commodity, not a currency, just like loaves of bread. You only have to pay taxes on it when you convert it to Fiat so as long as you just trade one commodity for another commodity, you haven't actually made any money on it.

I'm not an accountant and could be completely wrong.

[O.G. CIB | 415]

38 minutes ago, usmsci said:

Doesn't the bank just report it to the IRS so the feds can track you or make sure that the trail of money doesnt lead to smuggling drug money? I thought that was the only reason for it. I mean people with really good jobs deposit more than $10k per month in the bank just from employment (the magic number here is $10k for the bank to report by law). The IRS doesnt start writing them letters asking them where they are getting all this money. 

If you own a business and going to make a 6 figure sale you shouldn’t be looking for a free consultation. You are cruising for a bruising with this one. In any event your focus should be elsewhere. 

1. I would verify if Comic Connection is going to issue you a 1099.

2. Banks are required to report 10,000 transactions on IRS Form 8300 and they will hand it to you the minute you make a cash deposit. Check deposits are hardly ever done but it depends on if you usually move this kind of money or if the teller thinks the activity is suspicious.

It’s your gamble. If your found trying to evade the tax you’ll lose a lot more than whatever your tax basis is. 

Edited May 8, 2021 by Mr. CIB

[Bearcat-Doug | 5,105]

15 minutes ago, Code Monkey said:

This is the reason decentralized finances exist, trade it for Bitcoin. Bitcoin is a commodity, not a currency, just like loaves of bread. You only have to pay taxes on it when you convert it to Fiat so as long as you just trade one commodity for another commodity, you haven't actually made any money on it.

I'm not an accountant and could be completely wrong.

I was going to say the same thing if he doesn't need the money right away and is willing to hold the bitcoin since converting it to cash when it is received would cause a taxable event. 

[usmsci | 34]

2 hours ago, Mr. CIB said:

If you own a business and going to make a 6 figure sale you shouldn’t be looking for a free consultation. You are cruising for a bruising with this one. In any event your focus should be elsewhere. 

1. I would verify if Comic Connection is going to issue you a 1099.

2. Banks are required to report 10,000 transactions on IRS Form 8300 and they will hand it to you the minute you make a cash deposit. Check deposits are hardly ever done but it depends on if you usually move this kind of money or if the teller thinks the activity is suspicious.

It’s your gamble. If your found trying to evade the tax you’ll lose a lot more than whatever your tax basis is. 

I don’t own a business. I’m a simple sole proprietor. Yeah I’ll have to ask CC. Does heritage send out 1099-ks?

Edited May 8, 2021 by usmsci

[Gulag Joe | 584]

Like it or not, but you're going to have to pay tax on it no matter what. The IRS won't even have to come looking for you. Your bank will report it because it's an unusually large deposit so you will have to file a 1099k or report it in your total income. If you don't file, the IRS will likely track you down. No way around it, and it's only a matter of time. No excuses will change it. This is why the 1% hate the CG tax.

Edited May 8, 2021 by Gulag Joe

[O.G. CIB | 415]

8 hours ago, usmsci said:

I don’t own a business. I’m a simple sole proprietor. Yeah I’ll have to ask CC. Does heritage send out 1099-ks?

If you are a sole prop and file a schedule C you’re classified as a business with or without employees. I had this discussion with a couple friends who thought the same as you and didn’t realize they were missing out on the PPP money the government provide to businesses during the pandemic. 
 

I don’t use Hertiage or CC. I know eBay in 2022 is going to start sending them out to anyone who sells over $600 (we’ve had discussions on VGS about this). 
 

If i’m in your shoes and I sell it for 250k or thereabouts you would owe around 35k. Remember whatever fee’s you pay to CC should be deducted and “whatever” you paid for it years ago. This asset for you took off in the last 24 months so at the end of the day you’re still on top even if you have to share some with Uncle Sam.