Questions about cost basis

[Nutmeg Coin]

In "Antiques Roadshow" episodes the experts almost always ask what the owners of the antiques paid for their treasures. Why is this inappropriate in numismatics? To me actual cost and other attendant expenses that collectors and dealers spend on any given numismatic purchase is relevant in transactions.

[bochiman]

They can ask, but no one has to answer.

 

At the end of the day, the cost basis is irrelevant if you want the item and are ok with the price...and they are ok selling at the price.

 

Does it matter if they want $200, and won't budge from it, but the cost basis was $5, $50, or $100?

 

What if I found a 1955/55 DDO Lincoln in XF in change (I wish!). Does my cost basis matter if I am selling it now?

[Nutmeg Coin]

It seems that most other businesses are bound by reasonable buy/sell spreads. Though I can see that some questions may be rude, less so with dealer to dealer queries as to cost basis. From what I have seen some dealers are looking to double their money and other outsized profits. Of course there are exceptions to what most regard as reasonable buy/sell spreads; when a dealer sticks out his neck with large risk and gets the desired result. But any misrepresentation or pressure methods when buying and then selling run counter to ethical and proper dealer practice.

[BillJones]

The "cost basis" is really only important when figuring your income tax liability. It includes the cost of the item plus the expenses required to acquire it. For example if you buy somthing through the mail, the shipping costs are part of the tax basis along with any sales taxes. You can also allocate some or alll travel expenses, although you need to be able to back that up if the IRS comes knocking.

 

The cost basis means nothing when you are looking at market prices. The item can be worth more or less what you paid for it. What you paid for it has no bearing on that.

 

If a dealer charges double what he paid for something, then maybe the fault lies in the fact that he ripped off the person from whom he bought it. He might not be gouging now. And if he or she has owned it for 10 years, the argument about "ethics" is mute. The item is worth the current market price no matter what you paid.

[Nutmeg Coin]

Actually I hear quite often what dealers and sometimes collectors paid for the numismatics. Of course they do not owe it to potential buyers to share what they paid, but sometimes they use it as a rationale why they need to charge a given price. Large volume dealers may have trouble keeping track of everything anyway.

[KMAG100]

The "cost basis" is really only important when figuring your income tax liability. It includes the cost of the item plus the expenses required to acquire it. For example if you buy somthing through the mail, the shipping costs are part of the tax basis along with any sales taxes. You can also allocate some or alll travel expenses, although you need to be able to back that up if the IRS comes knocking.

 

The cost basis means nothing when you are looking at market prices. The item can be worth more or less what you paid for it. What you paid for it has no bearing on that.

 

 

I agree with Bill & Boch, cost basis is a methodology for tax determination and to determining rate of return (positive or negative) on a given investment or product. It is completely independent from market price, however indirectly influences market dynamics of what something can be sold/bought for.

 

Based off the market dynamics buyers and sellers determine if they want to continue buy/sell of the given investment/product at the given time in the market taking in account what their cost basis is and where they project the market may be trending. Everybody would like to buy low and sell high, and no one wants to be the buyer at the absolute high of a given market.

 

Inventory is a cash use, and cash is king. The management of inventory for a dealer differs from that of a collector. A collector uses cash to buy inventory to hold. Thus cost average of pieces is not as important due to length of time in inventory, or desire to acquire the specific piece out weights absolute best price (which is under constant change under free market conditions). +

 

However a dealer should be continually looking at what is the best use of their cash to maximize their IRR (Internal Rate of Return), thus they have to be very attentive to their turn rate on inventory based off current market conditions and expectation of near term market movements. They are continually faced with the decision (based of current market condition, near term expectation, and current cash reserves) should they hold on to current inventory with larger margins, or should they liquidate inventory and re-invest in new inventory because they think they can improve IRR, portability factor. The only way they are going to know their IRR is from their cost average calculations of which Mr. Market could care less about.

 

"A trend is your friend , until is Ends "

 

My 2 cents...and HOs

[RWB]

It's a TV show. Viewers are curious. During rehearsal the owners are asked if they want to state their cost.

[Houston Investor]

For Inventory Cost the direct cost of the coin plus any shipping or auction fees. I keep these on a fairly itemized detailed spreadsheet. Hopefully when they sell, Sales is greater than cost.

 

I keep columns to track the coins Inventory Cost, TPG Market Value, CW Values, and in some instances Krause Market Value (NN for coins, BNR for US Currency).

 

I don't discuss cost of my inventory nor consider questions about it appropriate. Its relevant only when filing schedule C (taxes) and my own internal analysis of how sales have been. When buying coins from someone at a show I do not inquire about their cost in the coin. I consider this inappropriate and irrevelant. What matters to me is my cost in the coin, its Market Value, etc.

[Nutmeg Coin]

"Pawn Stars" also asks about what owners paid in many cases, apparently they and other programs consider it relevant as well as past history. There is a point at which privacy and rights become indefensible, or cause for trouble. If you have a few homeruns and many other transactions where you break even or lose money, it can be irritating for those few advantageous transactions to be scrutinized, not the others where judgment calls were hard to accurately make, with unpredictable results. The main cause for concern would be transactions where one party used unreasonable or unscrupulous tactics in a purchase. And you see those scenarios on "Antiques Roadshow" fairly often where sellers did not do proper research or appraisal before selling, or were given inaccurate and critical assessment.

[Afterword]

"The main cause for concern would be transactions where one party used unreasonable or unscrupulous tactics in a purchase. And you see those scenarios on "Antiques Roadshow" fairly often where sellers did not do proper research or appraisal before selling, or were given inaccurate and critical assessment."

 

 

 

 

 

 

 

I think this is the very reason Pawn Stars and Antique Roadshow ask for this information, so they can more easily illustrate the scenarios you mention above to the viewing audience.

 

A competent appraiser would not need this information to give an appraisal and neither would a competent pawnbroker to make an offer. If either did make such a request, I would be very suspicious of their motive for doing so.

 

[USAuPzlBxBob]

More on Questions on Cost Basis

 

As I am only a collector, and not a dealer, this is a topic that is somewhat dear to me.

 

There are times when I want better coins, or different types of coins, to replace currently owned coins.

 

This could result from changes in collection goals; maybe I'm searching for a mint mark.

 

 

As a collector, if I trade-in a coin to a dealer at a loss for me, on my yearly taxes I cannot offset this loss as a capital loss to (possibly) defray a capital gain on another coin that I may trade-in for a profit.

 

In this way I’m a two-time loser in that I lose on the coin loss to the dealer, period, and I still have to pay, from memory, 38% capital gains taxes on the coin I profit from.

 

However, is there a loophole for me if I collude with the dealer?

 

Is it possible to proceed by finding agreement with a dealer such that "If I let you have this one, and this one, will you let me have that one?” (I have deliberately used a plurality of coins for my side of the bargain, and only one coin for the dealer’s side, to avoid any confusion in which side is which, going forward here. And it also offers the opportunity of trading up in overall quality, a typical reality when stretching for a coin of interest.)

 

Let's say the dealer agrees. It's a good deal for him. Maybe he already has a buyer in mind for the coins I am offering him.

 

Then it comes down to invoicing prices for each coin in the exchange, to legitimize everything, make everything come out jake. I let the dealer know that the very desirable coins I am letting him have from my side of the bargain, I will let him have for what I paid for them. (They are offered at perhaps far below current values, but this is immaterial to the argument, even though some eyebrows may rise.)

 

In this way, I have no capital gains because I have not made a profit on the amount I trade them for to him.

 

But, because the dealer receives my coins for so little, and because both of us have pre-bargained that it will be coins for coin, he then has to drop the invoicing price on what he lets me have his coin for.

 

Let’s say that the recorded invoice price for the dealer would net him a loss on his books, for his coin. The dealer, however, can absorb this loss, on his ledgers, because he is a dealer, and not a collector. Gains can be offset by losses.

 

When the dealer then sells the highly desirable coins I have traded to him to another customer, he’ll make back the loss of his coin invoiced to me because the severely-reduced basis involved with the coins I traded-in to him allows him to profit as though he had not suffered a loss on the coin he invoiced to me.

 

From the invoices drawn up, perhaps later shared to some extent with the good folks who update the NGC Price Guide, they would show that, for the 3 parties involved—me, the dealer, and his other customer—it would be found that the coins I traded-in to the dealer actually rose in value, when he sold them to his other customer, and the coin that I acquired from the dealer dropped in value. (This is touched on in the “whims” aspect of the last question asked below.)

 

So, my questions for this “supposed” scenario, and eliciting only your opinions, nothing more, are:

• Would I have to report my coins trade-in transaction with the dealer on my federal return, since zero capital gains were realized? (it would be like I never owned the coins I unloaded; easy come, easy go)
  
• Are dealers willing to generate severely-reduced coin-price invoices for coins that they part with in protracted trades, that actually net them a loss on their books, since the coins they receive, in lieu of the coins they severely-reduced, will more than offset those losses when future sales of the received coins are jacked up in price for sale to much-more-willing-to-buy, well-heeled customers?
  
• Is this sort of accounting technique legit, and correct?
  
• Does this manipulation of the books happen at all, if not all the time?
  
• Would this explain part of the reason why coins in the NGC Price Guide might swing downward (in this case for the coin I just acquired) or upward (for the coins I traded in) because the dealer later decides to only report to the NGC Price Guide only favorable portions of transactions, based on his whims?

[DaveG]

I think that if you're using words like "loophole," "collude" and "manipulation of the books" then you already know the answers to your questions.

 

My understanding is that the IRS is pretty experienced at prosecuting collectors and dealers (and others) who do things like falsify invoices in order to under-report their income.

[physics-fan3.14]

I have very definite opinions about your questions... but this is where I have to make a disclaimer:

 

"Questions of this type should be referred to a tax professional. The members of this board are hobbyists, and are not responsible for any decisions you make."

 

Now: carry on.

 

*commence political plug* A flat tax, or a simplified tax code, would solve all these problems.... *end political plug*

[USAuPzlBxBob]

The questions are all supposition.

 

I wish someone would have a little backbone on this.

 

Instead, everyone cowers. The almighty IRS.

 

A tax professional. That's a laugh! (I still use pencil and paper, and a calculator!)

[DaveG]

Using a falsified invoice to under-report income is a crime. It is not unheard of for people to get prosecuted for this crime. Therefore, I conclude that falsifying invoices is not entirely uncommon.

 

Another common technique is to buy something expensive in New York City, but have it "delivered" in New Jersey in order to avoid paying sales tax. Several years ago, a couple of high-end jewelers were prosecuted for tax fraud after putting themselves, their clients and the jewelry in a car in NYC and then driving to New Jersey, where the jewelry was "delivered."

 

If you ask a dealer to falsify an invoice for you, you are asking him to commit a crime. If he agrees, you will know that you are dealing with a crook. How will you then determine that the coin he is selling you is what he claims it to be?

 

Also, you've just asked a stranger to commit a crime for you. How will you ensure that he won't, at some point in the future, develop a need to turn you in to the cops in order to save his own skin?

 

A while ago, there was a criminal case on Long Island where a "collector", in order to hide assets, was buying coins from "dealer" using grocery bags of cash (in order to avoid falsifying invoices). To no one's surprise, the "dealer" had been selling over-priced, over-graded, "processed" and counterfeit coins to the "collector."

 

On the other hand, I doubt that the various price guides were affected by the falsified pricing represented by these criminal activities. Most of the coins involved were in the price range to be auction coins (say, $10,000 to $100,000), so there's enough public information available.

 

As I recall, in the Long Island case, the "dealer" would point to the auction results for a particular coin and then sell a supposedly similar coin to his client for less than the recent auction price. The coin he did sell, however, was usually altered to appear one or two grade points higher than it should have been and the "collector" wasn't skilled enough to notice that his "MS-67" example was actually an MS-65 example that had been AT'd to hide the attempt to conceal the marks that caused the coin to grade MS-65 instead of MS-67.

 

There's an awful lot of information from criminal and civil trials that is public - sometimes reading the transcripts or summaries can be entertaining.

[ldhair]

I love my CPA. He knows coins and everything else I deal with. He keeps me legal and I have no worry. Every deal needs to have an invoice. The invoice needs to show that you had a trade. You must keep an accurate record of the cost basis of every coin of much value.

[RWB]

Keep it simple, direct and truthful.

[Nutmeg Coin]

Anything tax related most people find impossible to navigate without a professional who crunches lots of returns on a yearly basis. And though audits should be much more pervasive to check up on various types of businesses and without which they would be even looser and less honest; there is no "crime" (ie "criminal law") under a certain % of non-compliance or full statement. The real crooks are those who game the system legally through lobbyists and politicians and there is no real correspondence between what is paid in and the solvency of the system in most cases especially in the lower incomes. It is more a matter of proper discipline and taking all legal deductions. Coin dealers who really practice the golden rule and treat all their customers right are rare, I don't know how they make a living at it.

[bourse28]

For me cost of my coins, except for tax reporting is confidential with the seller. What a TV show does in revealing cost of items to the audience is not relevant as to how I operate my Portfolio or converse with buyers at shows.

 

For accounting purposes I keep all purchase invoices / records and this becomes the cost basis of the coin in my accounting records or PJ (Purchase Journal).

 

Coin supplies, grading fees, sales commissions, table fees, paypal fees, publications, packaging materials are considered period costs and expensed.