Selling your stuff? Consider tax effects
[Editor’s note: In our last Housing & Homecare section, appearing in the April Beacon, we wrote about ways to declutter and downsize. In this issue, we address the tax implications of selling some of the more or less valuable items you choose to let go.]
The anti-clutter mantras of Marie Kondo and others are convincing thousands of people to empty their attics of the stuff they’ve collected over the years and sell the more valuable items on eBay or Facebook Marketplace.
In general, the IRS doesn’t require you to report money you earn from these sales. But in certain situations, you should, such as:
— If you’re essentially running an online auction house or garage sale; or
— If you’re selling valuables, such as fine art or collectibles.
Let’s look at each situation separately.
If you occasionally sell something online, there’s little to worry about, especially if you’re selling it for less than you paid for it. Even if you occasionally sell one of your old Beatles albums for a decent sum, it’s not critical for you to report this income to the IRS.
But if you decide to go into business bargain-shopping at yard sales and flea markets and flipping what you find for a profit, then you’re technically running a business. You’ll need to report this income on IRS Form 1040 Schedule C. This form is used by sole proprietors to report business-related income.
You’ll want to keep records of what you paid for the items (the cost basis) so you can report the net profits (rather than the full sales price) from these transactions.
You may also be able to offset income by deducting business-related expenses, such as gas and tolls for the vehicle you use to amass your inventory.
If you operate this business out of your home, you may even be able to deduct the costs of computers, smartphones, office supplies and Internet and cellular services, although we recommend you consult with an accountant to make sure you’re reporting these expenses correctly. In any case, make sure you keep detailed records of these costs in case the IRS ever decides to audit your business.
Online sales aren’t reported to the IRS if the total amount is relatively small. However, if you’re an eBay seller who uses PayPal, keep in mind that PayPal issues 1099-K forms (for payment card and third-party network transactions) to sellers who have more than 200 transactions and earn $20,000 or more in a tax year.
Selling more valuable items
The IRS is not so lenient when it comes to reporting the sale of fine art, collectibles and even precious metals. When you sell any of these valuables at a profit, you’ll generally have to pay capital gains taxes.
What counts as valuables? Just about any item whose market value has significantly risen since it was first purchased. Obvious items include paintings and sculptures, jewelry and gemstones, antiques and gold.
But, depending on market trends, just about anything could be a collectible, including, but certainly not limited to: coin and stamp collections; vintage comic books; rare books; fine wines; glassware; historical military items like Civil War uniforms and weapons; and political campaign buttons and posters.
Yes, even your rare Beanie Babies could be classified as collectibles if you sell them for many multiples of what you originally paid for them.
Whether you purchase valuables or inherit them, the IRS treats these items as investments, and their tax treatment depends on how long you’ve kept them.
That’s why it’s important to document the value of the item when it came into your possession, whether it’s the price (cost basis) for an item you purchased, or the fair market value (FMV) of an item you inherited. For particularly valuable items, you should have their FMV estimated by a professional appraiser.
If you don’t know the FMV or the cost basis, you’ll generally have to pay capital gains taxes on the entire amount of the sale, rather than the net profit (i.e., how much you sold it for minus the FMV or cost-basis).
If you sell a valuable item after holding it for less than a year, the profit will be treated as a short-term capital gain, which will be taxed as ordinary income. This could become a problem if this added income lifts your total adjusted gross income into a higher tax bracket.
If you hold the item for more than a year, the profit is considered to be a long-term capital gain. Normally the long-term capital gains tax rates on investable assets are either 0%, 15% or 20%, depending on your taxable income and filing status. But not for the profits from the sale of valuables and collectibles! For these items, the capital gains tax rate soars to 28%.
Your Uncle Jake bequeaths you his 1968 Shelby Mustang GT500 that has been sitting in his barn for 40 years. Because it has 190,000 miles and the body is rusted out, a professional appraiser assigns it a fair market value of “only” $70,000.
You spend two years and $10,000 to restore it and then sell it for $105,000. Your total cost basis would be $80,000, so your net profit is $105,000 – $80,000 = $25,000, and you’d pay $7,000 in capital gains taxes on that ($25,000 x 28%).
When it comes to investing in precious metals such as gold, silver and platinum, what you invest in can make a huge difference in what you’ll pay in long-term capital gains taxes.
Physical metals: Since physical metals are classified as collectibles, if you buy gold, silver or platinum in the form of bullion, coins, bars or other “hard” assets, you’ll pay the full 28% long-term capital gains tax rate on any profits you make from selling it.
Precious metal ETFs and mutual funds: Surprisingly, when you sell shares of investment funds that directly purchase precious metals, you’ll also be taxed at the 28% long-term capital gains rate if you sell shares at a profit. However, these rules don’t apply if you invest in these funds through a qualified IRA.
If you believe that the price of precious metals may rise but don’t want to pay the 28% long-term capital gains tax rate when you sell them, consider investing instead in the stocks of companies that either produce these metals (mining companies) or fashion them into products (jewelers, semi-conductor manufacturers). Any profits you make when you sell these stocks after a year will be taxed no higher than the 20% long-term capital gains tax rate.
Protect your assets
Whether you run an online auction house or want to finally cash in on the collection of rare Hummel figurines you inherited from your grandparents, your best protection against an IRS audit is to document both the initial value and the selling price of everything you put on the market.
If you have any questions about the tax implications of these transactions, seek advice from a qualified accountant or tax attorney.
Joelle Spear is a CFP® and financial adviser at Canby Financial Advisors. This article was written by and presents her views, not those of the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
© 2019 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.