Cost basis determination

[hoard]

How do you, in particular the dealers, determine the cost basis of a coin, for tax purposes, if you no longer have receipts or records of the purchase? Are you just out of luck in the IRS's eyes and declare the coin as obtained at face value? Or can you estimate based on my recollection of acquiring the coins in say 1988. I am getting ready to sell a few coins and was wondering. Thanks, in advance, for your thoughts. The items I sold this year, I valued at face value for cost basis, to be on the safe side.

[BULLY]

How do you, in particular the dealers, determine the cost basis of a coin, for tax purposes, if you no longer have receipts or records of the purchase? Are you just out of luck in the IRS's eyes and declare the coin as obtained at face value? Or can you estimate based on my recollection of acquiring the coins in say 1988. I am getting ready to sell a few coins and was wondering. Thanks, in advance, for your thoughts. The items I sold this year, I valued at face value for cost basis, to be on the safe side.

 

As I begin to start to sell items on eBay, the tax question burns in my mind as well. Do you even HAVE to declare income from items sold in eBay?

 

At what point does selling eBay cross a line from a casual sale to a business which the IRS would see as taxable?

 

So many questions.

 

Apparently, eBay had an online workshop recently on the subject, touching on a few of these questions:

 

http://forums.ebay.com/db2/thread.jspa?threadID=2000475608&tstart=0&mod=1198098102818

 

The IRS also has some information about this in a link:

 

http://www.irs.gov/businesses/small/industries/article/0,,id=163622,00.html#did

 

The link has other links, including a question about capital gains - I am not sure if it addresses your specific issue about a missing receipt for the original price. However, if you are having an "online garage sale" it may be a moot point. See the IRS link above.

 

The IRS also indicates that more informations is available in publication 535:

 

http://www.irs.gov/pub/irs-pdf/p535.pdf

 

Which you can also order from them, printed, to be mailed to you.

 

-----------------------------

 

eBay has an online workshop, today, 02/13/2008, details as follows:

Does eBay report sales to the IRS? When does sales tax apply? What's the best way to save taxes on your eBay earnings? These are the issues that you, the eBay Seller, want to know about. Please join CPA and best selling-author Diane Kennedy Wednesday, February 13th at 10:00 a.m. Pacific time for the Five Hottest Tax Issues for eBay Sellers in 2008 for a fun, interactive workshop

 

http://forums.ebay.com/db2/thread.jspa?threadID=2000509094&tstart=0&mod=1202863578955

 

 

[hoard]

thanks for the post. I will take a look. My accountant is sort of unfamilar with the whole collectible thing but is doing some research. Thanks again.

[Houston Investor]

It is critical to keep accurate cost records for your coins including receipts. Organization is the key. Costs allocable to the coin would include grading, shipping, and buyer's fees.

 

In the absence of this, I would simply estimate cost based on my best recollection. However, I believe the IRS will want to see receipts.

[World Colonial]

Under the tax law, it does not matter whether you are a coin dealer or just a collector, any profit you make from selling coins is considered taxable. Section 61 of the Internal Revenue Code covers everything unless there is a specific exclusion in another section.

 

The primary difference between being a collector and classified as a dealer is the tax treatment of the transactions and how you file. If you are a dealer, you will file on Schedule C If you are a proprietor. Form 1120 is used for Corporations and Schedule E with partnerships for your proportionate share of income, expenses, gains and losses. Individuals will use Schedule D

 

To my knowledge, the tax treatment differences are twofold. As a collector, you cannot deduct most of your expenses such as travel to shows or subscriptions. Also, your gains and losses are captital (short or long term though I do not believe there is any current difference in the tax rates) while dealers treat profits and losses as ordinary income. The reason for this is that coins are inventory just like shoes are to a shoe store. Dealers are in the business of buying and selling coins and not (primarily) speculating on future price changes.

 

As for cost basis, you are correct. If you cannot prove what your cost basis is in an audit, I understand it would be face value for US coins and who knows what for world coins. Your cost basis is usually what you paid for the item though you can add (or at least I do), expenses such as NGC grading fees.

 

If you did not buy the item for cash, then there are a couple of other possibilities. You might have received it as a gift or an inheritance. Inheritances receive the valuation on the date or the benefactor's death or the alternate valuation date. Gifts I believe receive the value on the date of the gift or posisbly the gifter's carryover basis. I simply cannot remember because there have been many changes in this provision. That is why for both gifts and inheritances, it is important to have a valid apprisal, at least for collections or coins that are valuable.

 

If you happen to have acquired the coin in a trade, there is a section of the IRC which allows for tax free exchanges. It is somewhere in the 1000 section though I cannot remember which one off-hand. Section 1012 covers cost basis for a cash purchase.

 

I am going off memory on these items, so if I am wrong, someone else can clarify or correct any errors.

[BULLY]

Under the tax law, it does not matter whether you are a coin dealer or just a collector, any profit you make from selling coins is considered taxable. Section 61 of the Internal Revenue Code covers everything unless there is a specific exclusion in another section.

 

According to the IRS web site, I am not certain that this is entirely true, and everyone's tax circumstances are different. A tax professional should always be consulted. My previous posting also has information and links to the eBay seminars on the subject.

 

http://www.irs.gov/businesses/small/industries/article/0,,id=163622,00.html#did

 

To this author's point though, a correct one at that, the basic notion is that if your intent is to buy and sell with the purpose of making money, then your income is considered taxable. Again, everyone's circumstances are different, but that's the rule of thumb.

 

The IRS does make distinctions about hobby vs. business, and gives a checklist of when you might start crossing the line (coin collecting is specifically mentioned):

 

http://www.irs.gov/newsroom/article/0,,id=172833,00.html

 

The good news may be what constitutes a loss or a gain. Not a tax expert, so consulting one may be the BEST ADVICE. However, based on what I've read in the eBay tax seminars and based on what I've read on the IRS web sites, I may be oversimplifying, but profit and loss may not just be overhead (heat, lights, oxygen), grading fees, travel, insurance, postage, etc., but also:

 

1. What is the VALUE of the coin, based on REPUTABLE, known, sources (Red Book, PCGS Price Guide, Numismedia).

 

2. If the value of a PF70 Ultra Cameo coin is listed in each of those as say $1,200, $2,100, and $1,850 respectively, and you sold the coin for $1,000, as I understand it, EVEN IF you bought the coin for $400 (and theoretically had a gain in this example), because you sold it at LESS THAN its FAIR MARKET VALUE, you actually had a loss.

 

3. If you do that CONSISTENTLY, you basically ALWAYS operate at a loss, and voila! No taxes! Book values/Price Guides can run high on a lot of Moderns, especially high grade ones, for instance. Just some food for thought (and something to look into, since I cannot provide you with a simple yes or no link to the IRS web site on the subject!).

 

AGAIN: I am not an accountant, CPA, or any other sort of tax expert. I've only recently begun to look into this myself, and only recently started reading about this, and thus started reading about the LEGAL, MORAL, and ETHICAL ways to report your taxes, and possibly not owe any. Thus, I encourage anyone and everyone to consult a qualified tax professional. Those eBay seminars are informative too, and the IRS web site is also chock full of advice, though they are not as forthcoming with the loopholes, even the legal ones.

 

 

 

[hoard]

I know that you pay 28% on the gain of any collectible. That is how the IRS treats it. If you have no cost basis records the acquisition cost is the face value. That is what I was told by the accountant. I can count any costs, against the sales gain, that were incurred for apprasials, grading, etc. I have not heard about the Fair Market Value arguement but it does not sound right on the face of it.

[World Colonial]

Under the tax law, it does not matter whether you are a coin dealer or just a collector, any profit you make from selling coins is considered taxable. Section 61 of the Internal Revenue Code covers everything unless there is a specific exclusion in another section.

 

According to the IRS web site, I am not certain that this is entirely true, and everyone's tax circumstances are different. A tax professional should always be consulted. My previous posting also has information and links to the eBay seminars on the subject.

 

http://www.irs.gov/businesses/small/industries/article/0,,id=163622,00.html#did

 

To this author's point though, a correct one at that, the basic notion is that if your intent is to buy and sell with the purpose of making money, then your income is considered taxable. Again, everyone's circumstances are different, but that's the rule of thumb.

 

The IRS does make distinctions about hobby vs. business, and gives a checklist of when you might start crossing the line (coin collecting is specifically mentioned):

 

This is correct and I forgot to mention it. But it only makes a difference to the taxpayer's DETRIMENT. Whether a hobby or a business, you will ALWAYS have to pay taxes on your gains but cannot deduct your losses if you are determined to be a hobbyist And the expenses that the hobbyist incurs are mostly either not deductible at all or possibly as a miscellaneous expense on Schedule A, Form 1040 subject to the 2% AGI test.

http://www.irs.gov/newsroom/article/0,,id=172833,00.html

 

The good news may be what constitutes a loss or a gain. Not a tax expert, so consulting one may be the BEST ADVICE. However, based on what I've read in the eBay tax seminars and based on what I've read on the IRS web sites, I may be oversimplifying, but profit and loss may not just be overhead (heat, lights, oxygen), grading fees, travel, insurance, postage, etc., but also:

 

1. What is the VALUE of the coin, based on REPUTABLE, known, sources (Red Book, PCGS Price Guide, Numismedia).

 

2. If the value of a PF70 Ultra Cameo coin is listed in each of those as say $1,200, $2,100, and $1,850 respectively, and you sold the coin for $1,000, as I understand it, EVEN IF you bought the coin for $400 (and theoretically had a gain in this example), because you sold it at LESS THAN its FAIR MARKET VALUE, you actually had a loss.

 

3. If you do that CONSISTENTLY, you basically ALWAYS operate at a loss, and voila! No taxes! Book values/Price Guides can run high on a lot of Moderns, especially high grade ones, for instance. Just some food for thought (and something to look into, since I cannot provide you with a simple yes or no link to the IRS web site on the subject!).

 

The current FMV value is irrelevent in calculating your gain or loss except under the circumstances I mentioned for gifts and inheritances because that historical value detemrines your cost basis. If you sell a coin for less than its current FMV you absolutely cannot deduct the difference between your sale price and the FMV as a loss. And if anyone is saying so to the contrary, I would not walk from that advice, I would run. The reason this is so is because the 1000's section of the IRC does not permit you to use current FMV as your cost basis for coins you buy.

 

AGAIN: I am not an accountant, CPA, or any other sort of tax expert. I've only recently begun to look into this myself, and only recently started reading about this, and thus started reading about the LEGAL, MORAL, and ETHICAL ways to report your taxes, and possibly not owe any. Thus, I encourage anyone and everyone to consult a qualified tax professional. Those eBay seminars are informative too, and the IRS web site is also chock full of advice, though they are not as forthcoming with the loopholes, even the legal ones.

 

 

 

I have added my comments above in bold to add clarification to my prior post and your comments.

[BULLY]

The current FMV value is irrelevent in calculating your gain or loss except under the circumstances I mentioned for gifts and inheritances because that historical value detemrines your cost basis. If you sell a coin for less than its current FMV you absolutely cannot deduct the difference between your sale price and the FMV as a loss. And if anyone is saying so to the contrary, I would not walk from that advice, I would run. The reason this is so is because the 1000's section of the IRC does not permit you to use current FMV as your cost basis for coins you buy.

 

Do you have links to these 1000s section of the IRC to which you reference, or quotes thereof?

 

 

[BULLY]

There was also a web site and a corresponding book referenced in one of the eBay tax seminars.

 

How useful it is I cannot say. The title is sure catchy, but I imagine that other titles would be less likely to see copies.

 

http://www.taxloopholes.com/index.php?s=stldetail&id=25

 

 

[World Colonial]

No, sorry. I do not have a link but you could just do a google search on the relevant sections. Start with 1000 and go on up. I know 1012 covers cost basis for purchases (It was a one sentence statement) but cannot remember the others. Tax free exchanges might be 1035. Gifts and estate could be in the tax sections that cover those items, I cannot remember.

 

The reason why I know this is because of my college work. My knowledge is dated but I do not believe the tax provisions have changed substantially, certainly not to the point where anyone could make economic profits but claim a tax loss in the example provided. That sounds like a tax shelter scheme that some promoter would dream up.

 

Just so you know, in most instances, the tax code does not have enough detail to cover the speciifics in this post. Here are the sources that anyone can use in a law library in priority:

 

The Internal Revenue Code;

IRS Regulations (follow the same numbering convention)

Supreme Court rulings (technically first but they have never or almost never invalidated the above two to my knowledge)

Circuit court rulings

Tax or District Court rulings

IRS Revenue Procedures

IRS Private Letter Rulings

 

The last one is specific to individual taxpayers but is used as a guideline by practicioners. Informal sources (which include the above information) include tax services such as Prentice-Hall and Commerce Clearing House (or did). These are private companies which have staff that provide interpretations of the tax law.