Question on Taxes and Hobby Gains
JrGMan2004
Posts: 7,557 ✭
It has come to my attention that I have not been taking very good care to track what I've sold and for how much, etc. etc. and it would be a good habit for me to get into for tax reasons. I was wondering if anyone knows what the current laws are on Hobby Gains?
-George
42/92
42/92
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Comments
42/92
I never made a profit on a coin
Have always wondered it the IRS will take a printout from your PC as proof of any loss or gain?
Will they want to see every invoice?
Loan Shark
Bajjerfan,
Hobby gains are not taxed as ordinary income but instead at a rate of either 15% or 28% depending on your tax bracket.
Gains are defined as the sales price less the adjusted basis.
42/92
<< <i>Bajjerfan, Hobby gains are not taxed as ordinary income but instead at a rate of either 15% or 28% depending on your tax bracket. Gains are defined as the sales price less the adjusted basis. >>
Not being a businessman myself, this may sound like a dumb question, but here goes:
In the way of "adjusted basis" I assume this is the price you paid for the coin, can it also include any cost of storage and additional packaging you have done to improve the salibility(sp?) of the coins?
Loan Shark
Steve
A hobby is just that--a hobby. No business license required. If I'm not mistaken, the IRS will generally want you to classify your hobby as a "business" if gains are realized in 3 of the past 5 years.
If you decide to start a business (sole prop--Schedule C), the advantage is that you will be able to "realize losses", unlike a hobby where losses are "deductible" only to the extent of gains. The downside to "business" vs. "hobby" is that income (gains) Will be taxed as ordinary income (your marginal tax rate) as opposed to the more favorable hobby rates of 15% or 28% (usually it's favorable however in your case this may not be the case).
LanLord,
I would agree with your statement (not to say this means the IRS would), I would also include shipping-in. So if you ordered a raw coin off the internet, your basis would be purchase price + shipping (in) + 3rd party grading fees for the coin. Shipping to and fro the grading company may or may not be included in basis, I'd have to look that one up.
42/92
<< <i>Hobby gains are not taxed as ordinary income but instead at a rate of either 15% or 28% depending on your tax bracket. >>
Ordinary income is taxed at 15% or 28% or more depending on your tax bracket' there are no special short term or long term rates for hobby taxes therefore my earlier statement is correct.
In the way of "adjusted basis" I assume this is the price you paid for the coin, can it also include any cost of storage and additional packaging you have done to improve the salibility(sp?) of the coins?
I would guess you could deduct slabbing expenses. SDB storage would have to be per coin so would be very minimal if you had 10 rolls of pennies in it.
What about expensive lodging at a convention as a write-off from the profit of coins sold at the convention. Example, I sold my Walker short set duplicates in Milwaukee at the Central States show, making several hundred profit. Can I write off the three nights lodging at the Milwaukee Hilton since it pertained to the sale of the coins??
I don't think a hobbyist could deduct those expenses but a dealer or business could.
What about expensive lodging at a convention as a write-off from the profit of coins sold at the convention. Example, I sold my Walker short set duplicates in Milwaukee at the Central States show, making several hundred profit. Can I write off the three nights lodging at the Milwaukee Hilton since it pertained to the sale of the coins??
For Hobby: Yes (these are called out-of-pocket expenses). However there is a caveat. The deduction is subject to a 2% AGI floor (Schedule A--itemized deductions) let me give you an example:
Job Salary: 88k
Hobby Inc: 12k
Gross Inc : 100k
Hobby ded: 10k (AGI=100K, out-of-pocket exp for hobby sub. to 2% floor .002x100k=2k, 12k-2k=10k)
Exemption: 3.05k
Taxable Inc: $86,950
This is very simplified, in fact it's a 3 tier deduction process. REMEMBER, a hobby loss is not allowed for tax purposes, so if your out-of-pocket expenses are greater than hobby income, the deduction will be limited. Also, if 2% of your AGI is greater than your out-of-pocket expenses, no deduciton.
For Schedule C Filers ("business"): Generally all is deductible as business expense without limitation.
Bajjerfan,
If you file in the 33% or the 35% tax bracket and you have Hobby Gains, you will be taxed at a maximum rate of 28%, NOT the ordinary rate of 33% or 35%. If this is contrary to your original statement, then your original statement is incorrect.
JrG,
I answered your question. It has nothing to do with amount of gains, it is the "3 out of 5 year rule". Basically, an activity is presumed to be a Hobby if no profits arise in 3 out of 5 years.
generally the IRS doesn't care about Hobbies since there are no realized losses. They are mostly concerned with sole-prop's (businesses--schedule C filers) realizing losses by booking bogus business expenses thereby avoiding taxes.
Sale of coins as a hobby is defined as short term or long term capital gains subject to a maximum tax rate of 28%.
The gross proceeds of each coin is reported on Schedule D less the associated cost basis (normally purchase price plus postage & insurance, etc.). The problem here is that a net capital loss would not be deductible at all.
If a coins are sold for $12,000 with a cost basis of $10,000 then the net short and/or long term capital gain is only $2,000. If you are in this categoryHobby expenses are extremely limited as shown below.
Hobby expenses in the hobby category shown above. are limited to $2,000 which usually fails the 2% floor test in schedule A miscellaneous itemized deductions.
The next level is investment, also schedule D followed by business, schedule C.
We have discussed these here previously in great detail. Perhaps we can retrieve those old threads.