What type of income would this be?

[rwom1217]

I am needing to amend my '20 and '21 returns.  In those years, I was buying unopened boxes/packs of sports cards from places like Walmart and Target, then reselling them via offerup, facebook marketplace, etc for a profit.  I was unaware at the time that I needed to report the profits from these.  But, I know now, so I'm gonna do it.  My question, is what type of income it is?

My intention with buying them was to resell some and keep some for my son and I as a collector/hobbyist.  Because I was actively buying at least some of them with the intent to resell for profit, it's my understanding that it would be considered business income rather than hobby income.  Is this right?

(Although it sounds related to a recent question I posted titled "Figuring out hobby income amounts", this is unrelated, so if any one happens to read that one, don't conflate them)

[Opus 17]

Se below for what the IRS says.  I think you are probably a business rather than a hobby, but you make that final determination based on all facts and circumstances (and then be prepared to defend that determination if challenged).  

If you decide it's a hobby, you can't deduct expenses but you don't pay self-employment tax.  If you decide it's a business, you can deduct expenses, but you pay self employment tax on the net profit.  The IRS can give you grief either way if they disagree. (For example, if you take a business and call it a hobby to dodge the SE tax, or if you take a hobby and call it a business so you can deduct unallowable expenses.)  Just be sure you can defend your decision. 

https://www.irs.gov/businesses/small-businesses-self-employed/business-activities

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. Some of the important facts and circumstances used to make this determination include:

1. regularity of the activities,
2. regularity of the transactions,
3. production of income, and
4. ongoing efforts to further the interests of your business.

You do not need to make a profit to be operating a trade or business but you do need to have a profit motive. The above list is not all inclusive in the determination of whether an activity is trade or business. For more information about making this determination, see Five Things to Remember about Hobby Income and Earning side income: is it a hobby or a business? 

Part-time Business

You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business also may be self-employment.

Example: You are employed full time as an engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word of mouth. You are self-employed as the owner of a part-time repair shop.

[Bsch4477 · Accepted solution]

You are a self employed business man who reports income and expenses on Sch C. 

[rwom1217]

For the '20 and '21 NAICS codes, would 459999 be appropriate (reselling unopened packages of sports cards by advertising via Facebook Marketplace and Offerup then the actual transactions occurring in person)?

[Bsch4477]

That would work. 

[rwom1217]

Would Pokemon cards fall under this also?  When I was selling, they were in my mind collectable items, and it seemed most people buying were in the same boat.  Pokemon is technically a card-based game though, and I believe some were buying for that purpose, so I don't know if these would fall under Collector's items or something related to game stores/retailers.

And then another question, if Pokemon cards don't fall under the more general Collector's items, even though they were "like new/unopened" when I sold them, would they be considered used since I bought them at retail?

For reference, the potentially related 2017 Collectors' items shops code is 453998, and the 2022 code is 459999.

[Vanessa A]

Yes, your Pokemon cards would fall into the same category.  If you were buying them with the intention of turning around and selling them, you would have been conducting a business, not investing in collectibles. 

Yes, they would still be considered new. Basically, Wal-Mart or wherever you were getting them would be considered your supplier where you purchased your new inventory to sell.  You just added in a middle man in the sales process instead of getting them direct from the manufacturer. 

Yes, for years 2022 and beyond (until changed), the code you will use for selling cards would be 459999.  If you notice, this includes swimming poll, flower, hot tub, candle and a few other retailers.  It does not change the way you would account for the income.  The NAICS codes do not affect your return.  It is for statistical purposes only. 

[rwom1217]

I don't think I described it well--so please forgive me if I am ultimately asking the same question twice due to my own misunderstanding.  My specific question was about the NAICS code to use, not whether or not it is a business (it is a business because my intent was to turn around and sell them, it just happens that what I was turning was collectibles), then I am wondering how to report the sales. 

So, Pokemon cards specifically are a game that also happen to be collectible.  So, would buying and selling these (with flipping them being the intent when buying them) fall under "games" or "collectibles" on the NAICS code?

Then, based on the answer to the above, would this income be included along with my sports cards sales, or should sports cards and Pokemon card sales be two separate businesses? 

Another way of asking, let's say I was buying and selling limited edition versions of Monopoly.  For the sake of this example, let's say most people buying these would be to keep for their own vast collections of different versions of Monopoly, though some would open them to play just as a game.  Would the NAICS code fall under "games" (because it is technically a game) or "collectibles" (based on their intent)?

[DaveF1006]

It depends. In reading your original post regarding your sport cards, these are considered capital assets. You purchase these at face value and expect to resell these at a profit.  These are personal investments for you rather than a business. This is the same principle as buying stock and bonds and reselling these in the future.  In this context, you would be paying either long term or short term capital gains tax rather than self-employed income. Sports and Pokeman cards are definitely collectibles and capital assets. In this case, you have the the intent of buying and selling these at a profit as investors normally do.

Now, is the decision-making time to declare this as a business or as a personal investment.  If you conduct large scale trading on a daily basis involving a multitude of transactions, then you may considered this as a business. The NAICS code is 523999, Miscellaneous Financial Investment Activities. This code represents sales of a broad spectrum investment activities but would be the most accurate  

In my opinion, i would not classify this as a game store (code 451120) unless you actually have a online retail game store set up as a website. This code would suggest that you are in the business of retailing new toys, games, and hobby and craft supplies. This would include sport card sales, Pokeman Card sales or Monopoly game sales.

The NAICS code for selling collectibles (tangible of course) is 453310. This would suggest that you are in the business of selling used collectibles.  Sports cards and Pokeman cards in their original conditions and unopened are not used collectibles so this would not be the appropriate code to use.

Hopefully, I have given you some food for thought and provided some guidelines on whether to report your trading as personal investments or treat it as a business. It depends on the volume of business that you wish to conduct.

@rwom1217 

[rwom1217]

@DaveF1006 You certainly have given me food for thought.  My belief was that it was considered a business because of my intent.  This is a summary of what I was doing...

- Go to retail store (Target, Walmart, etc).

- At it's peak, I was going to stores multiple times per week, sometimes waiting in a line for hours.  It was not uncommon for these to be out of stock, and for me to leave a line empty handed.

- My intent when purchasing the sports and/or Pokemon cards was to resell most of it, but keep some for my personal collection (both of which I did).

- Actual transactions might average 3-5 per week (very rough estimate), but it really varied with what I was able to get.  I might purchase some items on a Monday, and sell what I had in a number of transactions over the following few days, but then not have anything again for a week.  The buying/selling was not consistent as the items were difficult to find, stores were getting limited shipments, and most stores had people waiting in line for them to be stocked on the shelves.

- To sell them, I'd post on sites like Offerup and Facebook Marketplace, sometimes selling items within hours of purchasing them.

- I do not have a formal website or b&m store

- I still have some of the items

What is the actual determiner of this being a biz or investment?  I've read elsewhere that my intent to resell makes it a biz, but what you are saying about personal investments also fits, so call me confused.  I just want to do it right, so thanks for your assistance.

[LindaS5247]

The IRS treats most collectibles as an investment. 

However,  if ‌sports card sales are your primary source of income, you may be better off treating the buying and selling of the cards as a business and filing a Schedule C with the IRS.

It's tricky because the IRS does not specifically include sports cards in their regulations regarding this income matter.  They do define a collectible as any tangible personal property that the IRS determines is collectible.  The examples they give in their guidance are:

• Works of art
• Rugs, furniture, or antiques
• Precious metals or gems
• Stamp or coins
• Alcoholic beverages, most notably whiskey and wine

So clearly sports cards do fit in as a collectible in the eyes of the IRS.

Schedule C filers in general meet the following:

• You are the sole proprietor and are responsible for all profits and losses.
• Selling your sports cards isn’t your primary job, but your sale of sports cards generates a regular source of income.

This doesn't apply if you only occasionally sell a card. 

[rwom1217]

It was not my primary source of income, as I was not able to get them regularly enough to make that feasible. I did try to get them regularly though.  In 2021, I had about 10 transactions, selling around 90 boxes/packs of sports cards (total).  I only had a handful of transactions where I sold Pokemon cards.

If I lump sports and Pokemon cards together (even though Pokemon is also a game rather just collectible sports card), I probably had about 14 interactions where I sold around 100 boxes/packs of cards.

Perhaps collectibles is the way to go, as my intent with the ones I could not sell was to keep for me son and I or sell for a profit sometime down the road when they hopefully went up in value.

Edit: If one were audited, and made a mistake, which would be seen "better?"  Or, which mistake is the less of the evils?  To claim the income as a business but IRS determines its an investment, or the other way?

[DawnC · Accepted solution]

The cards you are keeping as an investment would be investment income if and when you sell them at a profit.  File these sales on Schedule D (personal/hobby).

The cards you are buying to resell at a profit are going to generate business income.    File these sales on Schedule C. 

And you can combine your sports cards and Pokémon game cards on the same Schedule C since they are part of the same card sales business.  You don't want to file multiple Schedule Cs if you don't have to. 

To minimize your audit risk, separate your business and personal transactions and be sure to include all of your business income and only business-related expenses.   Don't include expenses related to the cards you are keeping for your son on your card sales Schedule C.   You would only include expenses related to the purchases you intend to resell for profit.  You don't have to make a profit, but you have to have that intention, which you do. 

[rwom1217]

I did not do any card sales in '22 or '23.  It sounds like at this point though, any related sales of these items would be investment sales.  If that is the case, would I indicate in TT that I closed the business even if I end up selling more again this year?

And a related question.  During this time, I was also buying/selling Xbox consoles in a similar fashion, but with no intent to keep/collect any of them.  Would I also bulk these together with the cards sales with the business description of "direct sales"?

[DianeW777]

Yes, you would indicate you closed the business if you are now only investing for your son, even if you end up selling some of the cards at various intervals.  These will be sales of collectibles and considered investment income or loss.

The X-box consoles would be either a hobby or a business and is distinctly different than the investment for collectibles.  It would also be a separate business than the one for card purchases and sales.

As indicated previously, the rules for a hobby versus a business is very different.  However the intent and profit would be determining factors.  See the hobby versus business rules below.

This IRS link will help you: Business or Hobby?

Key elements:

1. A hobby requires you to report the income you received and under the current tax law, Tax Cuts and Jobs Act (TCJA), no expenses are allowed to be used to reduce the money collected even if you itemize deductions.
2. A business allows you to deduct the costs necessary to obtain the income.  The law explains that 'you must be engaged in the activity to produce a profit'.  The test under IRS tax law is that you must show a profit three out of every five consecutive years to be considered a business.

Use the links below to see how to report.

• How do I report income from self-employment?

To enter hobby income and expenses in TurboTax please follow these steps:

• Once in your tax return, click on Federal Taxes tab
• Choose Wages and Income
• Scroll down to Less Common Income and click Start to to right of Miscellaneous Income, 1099-A, 1099-C
• Click Start to right of Hobby income and expenses

@rwom1217