Scenario:
Some items of tangible personal property, purchased new for personal use may, over many years' time, become worth more than the purchase price -- think comic books, vinyl records, or automobiles. Assume that at the time these items were acquired, they were ordinary consumer (consumable) commodities (meaning, the quantities available for purchase were not limited, and it was common for them to be used, worn out, and disposed).
Further assume that the acquisition, use, and storage of these items is connected to a hobby. (I suppose almost any activity that is not a trade or business can be considered a hobby).
Questions:
1) Hobby capital gain income vs. hobby lossesGiven a hobby activity also involving the sale of items such as those mentioned above, with no office-in-home (OIH) or depreciation expenses, are the following statements correct? I think so.
a) These items are not hobby COGS (cost of goods sold) because they were not originally purchased as stock-in-trade, but rather for personal use. The fact that such items are typically held for twenty years or more strongly supports this conclusion.
b) Therefore, the gains from sale, if any, are capital gains, and are also included in gross hobby income (losses are personal losses, and not allowed for tax purposes). Hobby expenses that are not direct expenses of sale can be used to offset such income as a miscellaneous itemized deduction on Schedule A, subject to 2%-of-AGI limitation. (The direct expenses of sale would already be included on Schedule D when calculating capital gain).
Example: a vinyl record is purchased new in 1979 for $6, then played intermittently and stored. In 2009, record-cleaning equipment, a new stylus, and a price guide are purchased to determine the condition and value of this record and others like it (indirect hobby expenses). The record is subsequently sold via a web site for $15, less Paypal fees, shipping materials, and postage (direct costs) totaling $4. A long-term capital gain of $5 [$15 - $6 - $4] is reported on Schedule D, and indirect hobby expenses up to $5 are deductible on Schedule A misc-subject-2%-AGI section.
c) Most if not all tax software, as well as the IRS, expect the Schedule A misc-2%-AGI deduction for hobby losses to not exceed the Form
1040 line 21 hobby income, yet the correct treatment should be to include hobby-related capital gains from Schedule D as well as line 21 amounts when determining the limit for hobby loss deductions, as in the example above.In other words, most tax software will NOT correctly handle the example above, and the IRS may have unjustified heartburn over it too.
2) When does it become a "collectible"?When sold by the original purchaser, would such items (comic books, vinyl records, automobiles) be subject to the special maximum capital gains rate for collectibles? I think not (see IRC §408(m)(2) for definition of collectible).
Contrast with the purchaser of such used items, in his hands is it now a collectible for tax purposes? I think so, but can't find where this is written down in any code, regulation, or procedure.
-Mark Bole