As sports card values have reached levels we’ve never seen, more people have piled onto the hobby as an alternative investment. Even for those who may approach sports card collecting as a hobby, the chance of discovering or pulling a significantly valuable card rises as the average values continue to ascend.
After the New York Times reported that two LeBron James cards could be worth as much as $7 million, Forbes wrote an article explaining how the way someone owns a collectible can control how much income tax they will pay on the gains from the eventual sale.
Matthew Erskine, a trust and estates attorney and Forbes contributor, highlighted the five distinct types of taxpayers recognized by the IRS and how they pertain to collectors. The five types are the Investor, the Artist, the Collector, the Business Investor, and the Dealer. Erskine elaborates further, explaining that if you are not the creator of the item, the IRS will assume you are a Collector, which comes with the highest capital gains tax and fewest deductions.
The most seller-friendly tax status is the status of Investor, in which more deductions are possible. The tricky part is that being recognized by the IRS as an Investor is not so easy. Forbes explains that Investor status is not as easy to attain as saying, “I am an investor,” it requires well-documented patterns of purchases and sales, which an expert can help put together.
An Investor can also be classified as a hobbyist or dealer rather than an Investor, which can come with other advantages and disadvantages regarding taxes.
A Dealer can deduct losses as ordinary income instead of capital loss, while a hobbyist is someone who will rarely sell work. If a hobbyist does sell work, it is usually a capital asset where gains are recognized. Still, losses are not allowed, and expenses to maintain the collection are typically not deductible.
The main disadvantage of being a Hobbyist is that despite the 28% gains you would be subjected to upon the sale of a collectible, you would not be able to take the losses on collectibles’ sale. For those reasons, Erskine argues that the Investor designation is the most advantageous.
Ultimately, there are several different ways someone who sells an expensive card can navigate to shelter as much of their money as possible, and the important thing is to do some tax planning before the sale.