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PayPal Tax Forms Question for the vets


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On 11/15/2020 at 11:26 PM, Bricklectic said:

Thanks my friend is a CPA and claims that since we sell LEGO as an investment it's not like regular inventory that people buy to sell right away and profit on the bid ask spread or the wholesale/retail spread rather more akin to buying a stock and waiting for it to appreciate, basically an investment so it should be capital gains (as collectibles, which would be a high %).

If someone had capital losses lets say from stocks in prior years, that would be advantageous as it would net against the profits. another potential gain is avoiding to pay self employment tax

I seem to recall though that the amount of time you spend on it is also a determining factor as to whether its a capital investment or schedule c.

I know its real early for this type of talk but I'd be very interested in hearing insight form anyone thats researched this before. Personally I have been reporting this as sch c. in previous years.

business inventory is not a capital asset, only capital assets generate capital gains

https://www.accountingscholar.com/how-are-capital-assets-different-from-inventory.html

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1 hour ago, imirish11 said:

business inventory is not a capital asset, only capital assets generate capital gains

https://www.accountingscholar.com/how-are-capital-assets-different-from-inventory.html

 

I think inventory / capital investment depend on facts and circumstances. For example. A coin dealer's coins may be inventory for him as he doesnt invest in coins rather buys/sells and profits off the bid/ask.  A market maker on wall street also may consider stocks "inventory" while an average investor will treat it as an investment and a capital asset. 

Given that many of us here buy and hold for a year or more while waiting for sets to appreciate, it is more similair to a capital investment then it is to inventory.

An additional factor to all of this may be the time spent in the business which can render an otherwise capital gain into sch c. business vs a one off investment.

Edited by Bricklectic
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Buy/resell is business inventory. If you buy a LEGO set then put it on display at your museum and ppl pay to look at it, then you sell it for more down the road, then it is a capital asset because it generates a stream of income independent of its market value. For practical purposes, unless you have a degree in forensic accounting and can tell Karen the IRS agent how to do her job, then I highly recommend to report your LEGO toys as business inventory. 

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23 minutes ago, imirish11 said:

Buy/resell is business inventory. If you buy a LEGO set then put it on display at your museum and ppl pay to look at it, then you sell it for more down the road, then it is a capital asset because it generates a stream of income independent of its market value. For practical purposes, unless you have a degree in forensic accounting and can tell Karen the IRS agent how to do her job, then I highly recommend to report your LEGO toys as business inventory. 

Incorrect.

buying to resell is not always business inventory

examples: stocks, collectibles, precious metals, etc.  Lego is a PRIME example of collectibles.

I buy lego as a collectible and hold on for appreciation which is the very different than 99% of retailers who do not expect inventory to appreciate and is not part of their business model. Additionally, it is rare for someone to buy inventory without intention to sell for a while. Again, that points to the nature of the purchase here - it is an investments with the hopes of appreciation, similar to a stock purchase. 

 

"For practical purposes, unless you have a degree in forensic accounting and can tell Karen the IRS agent how to do her job, then I highly recommend to report your LEGO toys as business inventory. "

I happen to be a CPA although I do not practice personal taxes rather I work in the real estate industry.

 

 

Here is a good write up that sums up the issue:

The Court stated that the three principal questions to be considered in deciding whether the gain is capital in character are:

a. Was taxpayer engaged in a trade or business, and, if so, what business?
b. Was taxpayer holding the property primarily for sale in that business?
c. Were the sales contemplated by taxpayer “ordinary” in the course of that business?

 

 

The Court also indicated that various factors may be relevant to these inquiries, including the:

i. Frequency and substantiality of sales of property (which the Court noted was the most important factor);
ii. Taxpayer’s purpose in acquiring the property and the duration of ownership;

vii. Time and effort the taxpayer habitually devoted to the sales.

 

#1 and #7 are key here. If the frequency of sales are often enough and Time and effort spent working on the business is enough, that will make it be considered ordinary income and not capital gains, even if otherwise it would be considered capital gains.

 

Disclaimer, I am still researching this topic.

Edited by Bricklectic
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1 minute ago, redcell said:

If you get to the point of having to argue to a court that you meet the test for your Lego sales to be considered a capital asset, is the % that you stand save by winning really worth it?

well, depends on your savings. some of us have capital losses.

i am 1000% sure that someone who has a full time job and one fine day in december stumbles upon a bloomberg article about lego investing. and plunks down 10k to buy 15 MFs and then sells them in one shipment to amazon a year later that he clearly has capital gains. it would incorrect and tax fraud to claim that as ordinary income. T

I am also pretty sure that if you spend months buying months selling read brickpickr and frequnt walmart weekly then its ordinary income.

The grey area is between. I think up unto a certain point its reasonable to take a position either way. Like many many areas in tax, there are multiple defensible positions. 

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It is a capital asset if it generates a stream of payments independent of the change in its market value...LEGO isn’t an annuity, it doesn’t pay you anything until you resell it for a profit at a future date. If you have such an extensive stash of toys that major banks will accept that as collateral for a loan, then yeah you have a good argument that your collectibles are a capital asset. The obvious exception to the resellers are ppl that use them for photography, museums, unboxing videos, etc. Given the fact that the op to this thread doesn’t know the diff between sales tax and income tax, I would not recommend such an oddball tax strategy to any brick picker that isn’t prepared to do their own taxes, represent themselves in court or finance an extensive legal battle with the IRS over the semantics of the wording of the law. Having been audited previously, I can confirm that merchandise purchased for the purpose of resale is considered business inventory. To present any other tax strategy to an auditing agent would certainly make their job much more difficult and likely rub them the wrong way. 

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11 minutes ago, imirish11 said:

It is a capital asset if it generates a stream of payments independent of the change in its market value...LEGO isn’t an annuity, it doesn’t pay you anything until you resell it for a profit at a future date. If you have such an extensive stash of toys that major banks will accept that as collateral for a loan, then yeah you have a good argument that your collectibles are a capital asset. The obvious exception to the resellers are ppl that use them for photography, museums, unboxing videos, etc. Given the fact that the op to this thread doesn’t know the diff between sales tax and income tax, I would not recommend such an oddball tax strategy to any brick picker that isn’t prepared to do their own taxes, represent themselves in court or finance an extensive legal battle with the IRS over the semantics of the wording of the law. Having been audited previously, I can confirm that merchandise purchased for the purpose of resale is considered business inventory. To present any other tax strategy to an auditing agent would certainly make their job much more difficult and likely rub them the wrong way. 

Please explain how you understand the "collectible" category which the IRS directs to be treated as capital gains. There is a clear difference between inventory bought to sell vs inventory bought to appreciate as an investment. Its a simple distinction that is critically important and is exactly the entire fundamental concept of capital gains namely: money invested for appreciated returns vs ordinary income earned in a business or trade.

Although, as I mentioned earlier, the scope and time expended is also a factor in determining the nature of the business.

Edited by Bricklectic
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Capital Asset: I have a Lego collection. I put in on display. I charge people to look at my Lego collection. None of the income is derived from the change in the market value of the Lego toy.

Resale: I have a collection of Lego in my basement that I expect to resell in the future because I've posted about this many times on a popular website that promotes buying and reselling Lego. 

In this case, the IRS will reject the item being classified as a 'collectible' unless there is sufficient evidence to prove otherwise. For example, if you are able to obtain a multi-year loan from a major bank using your Lego collection as collateral, then you likely have enough evidence to claim that your collectibles are no longer classified as resale and should be considered long term assets.

Edited by imirish11
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4 minutes ago, imirish11 said:

Capital Asset: I have a Lego collection. I put in on display. I charge people to look at my Lego collection. None of the income is derived from the change in the market value of the Lego toy.

Resale: I have a collection of Lego in my basement that I expect to resell in the future because I've posted about this many times on a popular website that promotes buying and reselling Lego. 

If you are able to obtain a multi-year loan from a major bank using your Lego collection as collateral, then you likely have enough evidence to claim that your collectibles are no longer classified as resale and should be considered long term assets. 

Sorry but I think you're ignoring the basic understanding of the fundamental  concepts involved.

Capital gains relate to items bought for investment/appreciation

in contradistinction to inventory bought to immediately resell.

Collectibles purchases and resales (except for dealers for whom it is inventory) are classified by the IRS as capital gains.

Edited by Bricklectic
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2 hours ago, Bricklectic said:

Please explain how you understand the "collectible" category which the IRS directs to be treated as capital gains. There is a clear difference between inventory bought to sell vs inventory bought to appreciate as an investment. Its a simple distinction that is critically important and is exactly the entire fundamental concept of capital gains namely: money invested for appreciated returns vs ordinary income earned in a business or trade.

Although, as I mentioned earlier, the scope and time expended is also a factor in determining the nature of the business.

I have always figured that the old adage " if it walks like a duck and talks like a duck, it is a duck" would apply in this scenario.  One can craft whatever arguments one wants about why Lego is a capital asset v. inventory, but the final judgment will come down to someone in the IRS, other government official, or a judge accepting and believing that argument...and, at the of the day, you're arguing that a toy released within the last 5 years should be treated as a capital asset rather than inventory.  I have a hard time seeing that argument working.  

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1 minute ago, redcell said:

I have always figured that the old adage " if it walks like a duck and talks like a duck, it is a duck" would apply in this scenario.  One can craft whatever arguments one wants about why Lego is a capital asset v. inventory, but the final judgment will come down to someone in the IRS, other government official, or a judge accepting and believing that argument...and, at the of the day, you're arguing that a toy released within the last 5 years should be treated as a capital asset rather than inventory.  I have a hard time seeing that argument working.  

There are over a dozen financial articles that document clearly that Lego is a investment class that outperforms the market. It's not a hard case to make at all. Its super simple. Lego is a collectible. which appreciates. case closed. Textbook definition of collectible. What else do collectibles under the capital gains section mean?

https://www.bloomberg.com/news/articles/2019-01-17/lego-collecting-delivers-huge-and-uncorrelated-market-returns

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15 minutes ago, Bricklectic said:

There are over a dozen financial articles that document clearly that Lego is a investment class that outperforms the market. It's not a hard case to make at all. Its super simple. Lego is a collectible. which appreciates. case closed. Textbook definition of collectible. What else do collectibles under the capital gains section mean?

https://www.bloomberg.com/news/articles/2019-01-17/lego-collecting-delivers-huge-and-uncorrelated-market-returns

So do you believe that your average brick and mortar toy store that carries Lego should be treating it as a capital asset and not inventory? 

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1 hour ago, redcell said:

I have always figured that the old adage " if it walks like a duck and talks like a duck, it is a duck" would apply in this scenario.  One can craft whatever arguments one wants about why Lego is a capital asset v. inventory, but the final judgment will come down to someone in the IRS, other government official, or a judge accepting and believing that argument...and, at the of the day, you're arguing that a toy released within the last 5 years should be treated as a capital asset rather than inventory.  I have a hard time seeing that argument working.  

I agree with this interpretation. We have our own thoughts and serious approach to this investing. But when it comes down to it we are flippers and our interpretation bears less weight than the government. If you file with capital gains that means you have to be extremely diligent about quick flips being accounted for differently. Use the IRS website to make your determination, seeking out articles can get you what you want to hear. I was thinking the exact same things you were when I went through this. As I mentioned before, I think most people settle on schedule C. I think one of the biggest questions they ask is "did you buy with the intent to resell?" Also, chances are Lego isn't the only thing you sell. What if even a small percentage of your eBay sales is not Lego? 

At the end of the day if you can justify your reasoning you should probably be okay no matter what you choose in the very rare scenario that you are audited.

We're trying to help. Schedule C is what most here would recommend.

Edited by RightDwigt
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30 minutes ago, redcell said:

So do you believe that your average brick and mortar toy store that carries Lego should be treating it as a capital asset and not inventory? 

Intent is key. Is it bought to appreciate or to profit off the retail/wholesale spread. Vast majority of inventory purchases are to resell quickly at a small markup. Buying to invest and appreciate is extremely unusual and is exactly the idea of capital gains. do you know why capital gains are taxed at a favorable rate? look up the answer and youll get a deeper understanding

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1 hour ago, RightDwigt said:

 I think one of the biggest questions they ask is "did you buy with the intent to resell?" Also, chances are Lego isn't the only thing you sell.

I pretty much focus on Lego.

And that criterion is most definitely incorrect. stocks/collectibles/commodities are also bought with the intent to resell. what makes them different and capital gains is that they are investments, intended to appreciate with time.

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2 hours ago, Bricklectic said:

I pretty much focus on Lego.

And that criterion is most definitely incorrect. stocks/collectibles/commodities are also bought with the intent to resell. what makes them different and capital gains is that they are investments, intended to appreciate with time.

My mistake, you are correct on my quote. I was thinking of hobby vs business income. 

To each his own. For me it feels most comfortable treating like a business because it is. I have a fair mix of long holds but also enough quick flips and seasonal dumps that I didn't feel I could justify it all as capital gains. To the picker who primarily holds for 1 or many years, I could be convinced. 

There's a lot of feedback for future readers to browse through and make the decision that is best for them. As I said, chances are low that any of us would get audited but what's most important is paying your taxes one way or another.

I'm sure most of us have read this before, but it's a good one:

https://www.brickpicker.com/blog/community-lego-blogs/tax-implications-of-selling-lego/

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1 minute ago, RightDwigt said:

My mistake, you are correct on my quote. I was thinking of hobby vs business income. 

To each his own. For me it feels most comfortable treating like a business because it is. I have a fair mix of long holds but also enough quick flips and seasonal dumps that I didn't feel I could justify it all as capital gains. To the picker who primarily holds for 1 or many years, I could be convinced. 

There's a lot of feedback for future readers to browse through and make the decision that is best for them. As I said, chances are low that any of us would get audited but what's most important is paying your taxes one way or another.

I'm sure most of us have read this before, but it's a good one:

https://www.brickpicker.com/blog/community-lego-blogs/tax-implications-of-selling-lego/

Thanks good link, I missed that thread!

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1 hour ago, Bricklectic said:

Intent is key. Is it bought to appreciate or to profit off the retail/wholesale spread. Vast majority of inventory purchases are to resell quickly at a small markup. Buying to invest and appreciate is extremely unusual and is exactly the idea of capital gains. do you know why capital gains are taxed at a favorable rate? look up the answer and youll get a deeper understanding

I always figured that capital gains are taxed at a favorable rate because they tend to be owned and held by the wealthy who have the power to lobby for favorable tax treatment.  I'm sure there is some theoretical justification too, but I tend to take a more pragmatic and cynical view of the world. 

Intent is actually not the key.  If you refer back to the three part test that you cite above, the first part is not an intent-based inquiry, but asks whether the taxpayer is involved in a trade or business.  You can say that you did not intend to be engaged in a trade or business until you're blue in the face, but if you're doing something that looks like a business, the objective presentation of that activity will easily outweigh the self-serving assertion that you intended to be doing something other than operating a business (which will simply come across as an intent to avoid tax liability through clever argument).

This first question in that test ties directly to the subsection of the statutory definition of capital asset that excludes inventory (i.e., assets held for sale in the course of a trade or business) from being a capital asset.  Thus, in the first instance, the IRS or Tax Court is going to ask whether you are selling Lego in the course of operating a trade or business.  If the answer is yes, that is pretty much going to resolve the question because if the IRS or court finds that you are engaged in a business selling Lego, it will be pretty hard to argue that you did not intend to sell the Lego in question in connection with that business.  If you can convince them that you're not engaged in a trade or business, the asset couldn't be inventory.     

Also, you assert that Lego is a collectible as if it were a proven fact (i.e., "case closed").  However, what you overlook is the fact that Lego does not fall within one of the recognized categories of collectibles under the tax code and would only be considered a collectible if deemed so by the IRS under the authority granted by the tax code to categorize assets as collectibles in addition to those specifically listed in the code.  The evidence that you are relying on to prove that Lego is a collectible would certainly provide a basis for the IRS to reach that conclusion, but things don't always work out in the real world the way you think they will.  In reality, I would wager that your average IRS auditor is going to start from the position that what we're doing here is a toy business in which Lego is an item of inventory and that it will be a very tall hill to climb to convince him or her that it is a collectible simply because Lego appreciates over time and you did not buy it with the intent to resell in a short time frame.  In my experience (none with the IRS though), government auditors tend to start from the position that you're trying to screw the government in one way or another and aren't particularly charitable or inclined to accept arguments like the ones you'd be making here. 

 

4 minutes ago, RightDwigt said:

To each his own. For me it feels most comfortable treating like a business because it is. I have a fair mix of long holds but also enough quick flips and seasonal dumps that I didn't feel I could justify it all as capital gains. To the picker who primarily holds for 1 or many years, I could be convinced. 

 

That the safest course of action.  I hold the vast majority of my inventory for 12 months or longer and buy it because I think it will appreciate, but I don't think there is a snowball's chance in hell that I could convince the IRS that I'm doing anything other than running a business.

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1 minute ago, redcell said:

I always figured that capital gains are taxed at a favorable rate because they tend to be owned and held by the wealthy who have the power to lobby for favorable tax treatment.  I'm sure there is some theoretical justification too, but I tend to take a more pragmatic and cynical view of the world. 

 

 

From what I recall learning, there's a simple rationale for the favorable taxation of capital gain: Ordinary income is earned by people through their main trade or business. After the money is earned, it is in the best interests of the government and the economy that the money not sit in some bank account doing nothing but rather spur further economic activity. Investments therefore are treated at a lower rate to incentivize them. I think we can all agree that that makes plenty of sense.

In regards to intent, I still believe there are 2 criterion. You need it to be an investment AND not to be a main trade or business. One without the other is insufficient. So even if its a capital investment because you buy and hold for appreciation - If youre constantly occupied with the side hustle, it rises to being treated as a regular business and trade.

That's all I say on this at the moment. Ive spoken to a couple of CPA's about this but I will be reaching out to my professor who knows this area of tax law very well.

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12 hours ago, Bricklectic said:

From what I recall learning, there's a simple rationale for the favorable taxation of capital gain: Ordinary income is earned by people through their main trade or business. After the money is earned, it is in the best interests of the government and the economy that the money not sit in some bank account doing nothing but rather spur further economic activity. Investments therefore are treated at a lower rate to incentivize them. I think we can all agree that that makes plenty of sense.

In regards to intent, I still believe there are 2 criterion. You need it to be an investment AND not to be a main trade or business. One without the other is insufficient. So even if its a capital investment because you buy and hold for appreciation - If youre constantly occupied with the side hustle, it rises to being treated as a regular business and trade.

That's all I say on this at the moment. Ive spoken to a couple of CPA's about this but I will be reaching out to my professor who knows this area of tax law very well.

One piece of advice...if this is something that you're worried about, talk to a lawyer who actually litigates tax cases.  You seem to be working from a very textbook view of the law, which is fine as long as you don't have to step into court or an administrative proceeding to actually defend the conclusions that you reach.  Once you cross that threshold, things can often play out very differently than the way they should based on what the textbooks say.  Practical considerations often play a much larger role in driving the outcome of disputes than they should or than you would think they would based on textbook learning.

 

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