As we all know - Pokemon has gone above and beyond anyone’s expectations this year. That means that there is A LOT more money flowing around the market and a lot of people are cashing in some of the things they’ve been holding on to due to it being life changing money. I’ve sold some things for prices I didn’t think were possible and I want to contribute that money toward a house down payment.
My main goal of these questions is gain knowledge on the topic of taxes and our world of Pokemon buying/selling specifically. I’ve seen a lot of people that need the same help as I do and I figure there’s a lot of smart people in here as well as business owners that could help answer a few things for not just myself - but for everyone with these questions.
MY SITUATION: (because not everyone’s situation is the same)
Been collecting for about 4-5 years. There have been price spikes all along the way. I started with a small chunk of money and have bought and sold SOLELY to afford more cards along the way. I’ve never used my hobby money for other things. I’ve had a job most of that time and use the job money to pay bills keep a small portion of it to fund personal expenditures. My hobby money has climbed and climbed but its always low because I’m always spending it on more cards, etc. I’ve flipped the occasional craigslist collection and graded cards for profit along the way like everyone else but always to afford more cards. It’s never been to the point where I’ve been worried about taxes or calling myself a business.
This year is much different. This year I’ve sold a few things I bought for hundreds and sold for thousands and made a lot of eBay sales. Based on my own market projections I decided to liquidate a lot of stuff I don’t need and I’ve spent a ton of money on cards this year as always as well but I want to take a big chunk (maybe 10k or so) and dump it in to house fund. I sold out of a big part of my slab collection and other things I was holding and bought a new part of my collection so I have a lot of transactions this year with a pretty large amount of money moved around. A lot of this is via eBay and PayPal. I definitely have more money in my accounts than ever before due to all of this and I’m looking for advice on the best way to be LEGAL about everything and keep as much money after taxes as possible of course so I can make those contributions legally for my family and also keep collecting worry free while developing a better understanding of how it all works moving forward.
The options I THINK I have for my taxes for ALL SALES/PURCHASES THIS YEAR:
File the sales as normal income tax for a hobby. (Sales of cards held over 1 year are eligible for capital gains?)
File as sole proprietor (free): self-employment tax + income tax - deductions for costs of goods sold and other appropriate things I can deduct to reduce taxes as much as possible on a “Schedule C” form.
Become an LLC (not free) and file as such: dont think there is any benefit to this over just filing as a sole proprietor in the business of selling cards online. I have no employees and not worried about being sued because a card gave someone a paper cut or something. haha.
Main questions:
Do you think I should file as a hobby or business of some kind (if so which)?
Does an LLC present any distinct advantages I should look in to?
What all deductions are you guys currently marking to help reduce taxes as much as possible if you are filing as a business?
Are there any money thresholds I should know about for sales through paypal, ebay, etc that determine how you file?
How do you approach F&F payments in regards to taxes?
Are the options I listed above my only options and do I have the information within them correct?
I’m sure I have many more questions and others do as well. If you have answers or questions - please post them below as I think this could help a lot of people potentially. Thanks!
I think you should probably get a lawyer if you’re asking these questions. Sounds like your working with some nice capital and a professional would be the best bet.
I have my accountant looking into this as I am in a similar situation as well. I just gave him a spreadsheet of my purchases/sales info for the year and hoping to hear back from him soon. I will let you know what he informs me once I hear back from him!
Nobody except a tax professional in your local jurisdiction can answer all these properly. IMO, find someone sooner rather than later to pay hourly to discuss these things. A hundred to a couple hundred bucks an hour may seem like a lot but saving potential IRS audits/penalties/fees etc. and having the peace of mind that you are doing things above board would be well worth it.
Looking at the questions you’ve asked and the way you’ve asked them you’ve clearly spent some time looking into this yourself which will save yourself a lot of time and money when consulting with a professional as you won’t be asking the really vague questions to begin with that are typically asked here (and I was asking on the clock with a CPA several years ago).
I’ll partly answer some of the questions I feel a bit more comfortable with but take them with heaps of salt and take this as a disclaimer that I am in no way a tax professional of any kind.
Do you think I should file as a hobby or business of some kind (if so which)? - I won’t say what you should do, but what I’ve found is best for me is filing as a sole proprietorship under my SSN.
Does an LLC present any distinct advantages I should look in to? - See #1, I found no advantages for me with an LLC.
What all deductions are you guys currently marking to help reduce taxes as much as possible if you are filing as a business? - Make sure you use these only if they apply to you but some that are frequently used off the top of my head, mileage, business use of home, fees of all kinds (grading, eBay, paypal, tax filing, etc.), any costs associated with selling (printer ink, postage, packing materials, potentially phone/internet bills, purchase costs obviously and sometimes this is captured in costs of goods sold if maintaining an inventory).
Are there any money thresholds I should know about for sales through paypal, ebay, etc that determine how you file? -Probably
How do you approach F&F payments in regards to taxes? - Pay taxes on all money received regardless if it is 1099’ed or not.
Are the options I listed above my only options and do I have the information within them correct? - Probably not entirely but I’ll ask a question back with this part. Have you properly filed taxes with respect to previous dealings? (this is more rhetorical than actually requiring an answer). Are you using cash or accrual basis? Remedying some previous mistakes or omissions may be the most difficult part of doing what is proper for this year and into the future and again this should all be discussed with a profession. Best of luck.
I was joking I don’t sell enough to have ever considered reporting. This is the only guidance I’ve ever read through regarding the IRS and collectibles:
Hire an accountant, you can even use the cost of your accounting fees and write that off your income.
Some other write offs to consider would be mileage, keep track of trips to the post office or to go buy supplies that is if you are driving your own person vehicle.
Food, everyone loves to eat and if you are out sourcing inventory or supplies and you stop to get some lunch that can be considered a business expense
Office space, this can include storage. Calculate the sq ft of space used inside your home or garage that you use for conducting business or storing your inventory/supplies. I believe I get $5/per sq ft.
Snow removal, if you live in an area where you get snow and you pay someone to remove it. It is vital to have snow removed in order to go to the post office or go out to buy supplies.
Other more obvious write offs that I believe have been mentioned, shipping supplies, paper, printer ink, pens, cameras, phones, printers, scanners, laptops, phone, phone bill, internet bill, PayPal fees, eBay fees.
I assume each state might vary a bit so it is best to hire an accountant, mine is a family friend who doesn’t charge me much but regardless it shouldn’t cost much and is worth knowing you are doing everything to obey the law. Also make sure to keep receipts and file everything and hold onto it for 5+ years in the chance of an audit.
@thecardguyz, I believe claiming income from collectibles as long-term capital gains may be the best route if you don’t have significant business-related deductions. It’s my understanding a sole proprietorship is subject to a 15% self-employment tax on top of both federal and state income tax. Since collectible sales are considered capital gains, you can subtract the “basis” (cost of purchase, grading fees, sales fees, and shipping) from the sale price for each item, but no other business expenses. You would still have to pay the federal and state income tax rates, but not the 15% self-employment tax on those sales.
Assuming for example, you are in the 22% tax bracket from your job and eBay sales ($40,126-$85,525) and your state tax rate is 6% this is roughly what each scenario might look like:
Sole Proprietorship: 43% of Profit - Business Expenses
Capital Gains: 28% of Profit
*This is new to me too, but that’s my understanding.
@thecardguyz, I’m in almost the exact same situation as you. I’m meeting with my tax advisor on Wednesday, feel free to PM me, if you’d like an update with any additional information.
Awesome question as I am in the exact same boat as you. Never expected to make as much as I have in 2020, and lowkey sweating thinking about tax season. I will hire a professional and come back to share my results or methods when the time comes. Thanks to everyone who posted!
The difference between hobby (short or long term capital gains) and self-employed business treatment of your collectible transactions is a bit complicated.
If you have another regular job that provides benefits and which covers things like health insurance and payments to Social Security and Medicare, then the hobby option might be more beneficial, especially if your transaction time (between buying and selling) is more than 1 year. You are simply paying a specific percentage of transactions in taxes,
If most of your income is from buying and selling cards, then the self employed business option might be more valuable. If you are in business there is a greater range of deductions available. The self employment taxes you pay can help qualify for both Social Security and Medicare benefits. And half of the FICA contributions qualify as an itemized deduction. If you are paying for your own medical insurance, you can write that off as a business deduction so long as you show a profit (although you can’t write off more than your profit). You can often expense 100% of supplies and technology you purchase for your business (like laptops, storage items, more cards for inventory, insurance on your collectibles, etc.) And 20% of your net profit that flows to you personally is exempt from Federal Income taxes.
The business route is a bit more complicated since you may have to prove you are more than simply a “collector”. But the threshold isn’t hard for anyone who both actively collects and does a decent amount of selling along with the buying. The business option allows you to actually show a loss and utilize it against other income sources in the year the loss is incurred. With hobby income you are much more limited in how and when you can deal with losses. The flip side is that when you claim yourself as a business there is an expectation that you are trying to make a profit. In normal times multiple years of losses can run you into problems with the IRS.
I don’t sell enough to have ever considered reporting. This is the only guidance I’ve ever read through regarding the IRS and collectibles: