Tax Planning

Do you will have a $ 7 million buying and selling card? Time for an revenue tax plan!

How much are these trading cards worth today?

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Recently, the New York Times NYT reported that two LaBron James trading cards could be worth up to $ 7 million. Make sure you find and sell one of these cards! Also, think about your income taxes when selling works of art or collectibles. Your income from the sale of tangible assets, such as trading cards, is taxed differently than income or profits from other investments. How you own a collectible determines how much income tax you pay on the profits from a sale.

The IRS recognizes five different types of taxpayers: the artist, the collector, the investor, the business investor, and the trader. IF you are not the creator, the IRS will assume you are a collector (which will charge the highest capital gains tax and allow the least amount of deductions). In fact, you can qualify for the more favorable tax status of the investor, which allows more deductions, as well as using techniques like exchanging species. Qualifying as an investor is not as straightforward as an explanation and requires a well-documented behavior pattern from your client. However, a qualified professional can help your client position themselves to get the most desirable tax status.

The artist

Spanish woman with her painting tools in Barcelona

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The artist

An artist’s work can sell itself multiple times during its lifetime and later, and it can be seen more than once in galleries. Sales value can vary from a small sum to millions of dollars, as in the work of Picasso, Van Gogh, etc. An artist can get notoriety during his lifetime or never get it; However, your works are no less important. An artist can practice his craft as a profession, as a for-profit trade or business, or as a non-profit activity. Income would be taxed as ordinary income and, in general, expenses would fall under IRC § 162. However, for activities that are considered non-profit-making according to IRC § 183, the deductibility of expenses is limited to gross income.

Beyond the artist: investor, hobbyist, business collector and trader

Once the artwork leaves the artist’s hands, it generally goes to one of four categories of people, each with different tax considerations. You are the investor, hobbyist, business collector and trader. Which category a taxpayer falls into depends on the facts and circumstances of that taxpayer’s case. The boundary between these categories of art owners is not always clear for tax reasons; Therefore, there have been numerous legal disputes in court, for example the distinction between an investor and a trader or between an investor and a hobbyist.

In addition, a taxpayer can hold art in different categories. For example, a trader may hold certain works of art in their trade or business and other works of art as an individual investor. Various expenses and losses in each category may or may not be deductible and depend on facts and circumstances. Every private taxable collector should have a bespoke plan based on a step-by-step consideration of determining the category they fall into when buying, holding or selling an item. When costs or losses are deductible and you should contact your subject matter expert if necessary. A brief introduction to the four categories follows.

Excited businessman holding picture frame

Invest in art

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The investor

An investor is a person who buys, sells, and collects art only as an investment in the hope that the asset will appreciate it to be able to be sold at a profit. For an investor, the art investment is generally taxable as a capital gain on sale, unless it does not fall under the definition of capital assets. According to IRC § 1221, capital assets include all assets with the exception of:

(1) Commercial or real estate holdings of the taxpayer, which are mainly sold to customers in the context of his trade or business

(2) Real estate that is used in the trade or business of a taxpayer and is subject to value adjustment, or

(3) An artistic composition by the Creator or a person in whose hands the basis of such artistic composition is determined with reference to the basis of the Creator. A gift from an artist to an individual would fall under category (3) and would be taxable as normal income property.

Loss of capital is available to an investor under IRC Section 165 (c) (2) if the test of intent can be demonstrated to complete the transaction at a profit. The taxpayer must provide evidence that the purchase and sale of the work of art was a for-profit transaction. Many factors are considered based on the facts and circumstances of the taxpayer’s case. However, the taxpayer’s personal use and enjoyment of the work of art are generally a critical factor in showing that the intention was not profitable.

An investor may be classified as a trader or a hobbyist instead of an investor based on the facts and circumstances in their case. Sometimes investors want to be classified as traders when they lose, so that they can deduct the loss as decent income rather than capital loss.

The hobbyist

A hobbyist is a collector who buys art or other collectibles without considering whether it will ever be a profitable investment. The hobbyist seldom sells a work that, when generally sold, has a net present value that recognizes gains but does not allow losses (IRC §§ 1221 or 165 (c)). According to IRC § 262, expenses for maintaining the collection are generally not deductible; However, IRC § 183 may allow some deductions up to the amount of gross income generated by the activity under the IRC § 183 ordering rules. The disadvantage of being a hobbist is that you pay 28% on the profits from the sale of a collectible you are unable to bear the losses from the sale of the collectible. Hence, hobbyists try to be classified as an investor.

The business collector

A business collector does not buy the art for resale, but for purposes such as office exhibition or decoration in the normal course of trade or business. Art is generally not subject to any depreciation as its useful life cannot be determined. In addition, many companies buy art for investments that they can put in the investor or hobbyist category. The art investment can be such that it crosses the line to the dealer. Again, facts and circumstances must be checked in each individual case to determine the categorization of the activity.

Beautiful woman in her late fifties with silvery gray hair wearing a glamorous red evening dress while standing in a staircase in front of gold-framed oil paintings.

The art dealer

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The dealer

The dealer is one who buys and sells art as a trade or business. An art gallery is one such type of dealer. Art dealers are taxed like any other retail business. As such, all income including income from the sale of art is taxed as ordinary income (IRC §§ 61, 64). Ordinary and necessary expenses can be deducted in accordance with IRC § 162. Traders sometimes want to be classified as investors because of the favorable capital gains rates, rather than being taxed as ordinary income on those gains. In addition, dealers, including gallery owners, often wear the hats of an art investor as well as an art dealer, both of which are viewed as separate activities. There are many lawsuits dealing with this issue such as Williford v Commissioner, TC Memo. 1992-450.

So if you find that the LaBron James trading card that you spent $ 300,000 on is now worth $ 7 million, compliment yourself on your investment, but consider doing some tax planning before you go they sell!

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