Done Hoarding, Clearing Out, Tax Questions! (USA)

[donehoarding]

So in 2011 I started hoarding Lego... not bulk sets, but I had an obsession with buying one of each. This year I realized how much I had been spending and had to cut it off and start cleaning it out. I had no idea how much the stuff was going to rise in value and I started with the most valuable sets and cleared out my 50 per month on eBay without having to pay any listing fees. I got tired of being that chick who had two full rooms in her house loaded with bags of Lego sets. I've never hoarded anything else, but for some reason I started buying Lego sets. I was able to go cold turkey thankfully starting January 1, 2017, and just want to clear them out.

So now I sit at well over 40k in sales on eBay this year and no idea what to expect come tax time. I had no idea it was going to blow up like this and was completely unprepared.

I will of course consult a professional but the year is closing and I wanted to get a grasp of what I am in store for, and what I should do going forward to help lower my tax liability as there is still a good deal to unload. One thing I do have is each of my purchases in bags with their receipts, so I have my initial investment cost.

First, I never registered as an official business or set up an actual eBay store. Am I able to claim any of deductions like a "home office deduction" or any of the shipping and eBay/Paypal fees? Or is that only available to people who register as an actual business?

Does anyone know off hand what tax forms they use for their deductions so I can look them over to maybe get a grasp on what I'm in for this year.

From my understanding my base tax liability is something like "Sale Price - (initial cost + shipping + eBay/Paypal fees)". Is that correct?

One good thing anyways is I've spent very little of the eBay money I've made so I should have no issue paying the tax man when he comes around.

Sorry that it's all a bit jumbled. Thank you so much for all the help and knowledge!

[RedBaron]

Hi.  You will need to include a Schedule C with your individual tax return.  The form has lines to include all your expenses.  You can also claim home office expenses on form 8829.  Feel free to PM me with any other questions.     

[TheBrickClique]

You can deduct all the expenses that went into selling. Don’t forget shipping supplies.  You can also deduct credit card interest if applicable. I also deduct part of my utilities (Internet primarily) and expense part of my computer since I primarily use it for eBay. I even have a dedicated shipping computer that is 100% expensed as well as the printer and toner I use with it. 

I don’t deduct my home office. Here’s why:  you can only really deduct and save so much from your home office. But, once you treat that square footage as a business expense, it will be difficult to convert that back to a non-business asset when you get out of selling on eBay. And as a business asset, you do not get the write off of any gains if you sell your home for that portion of the house. So, if your home has gone up in value, the taxes on the equity you’ve gained may be more than you would ever save as writing it off as a business asset.

btw, income tax is easy. The tricky bit is if you have to file sales tax to your state. For example, in California, you have to register with the state board of equalization and submit sales tax on a annual schedule based on your sales amount. And when you do, that often triggers the county or city you live in to check your business license status and they will ask you ever politely to get a license. If you haven’t collected sales tax, at least many states will let you deduct the sales tax you paid when acquiring the sets towards the sales tax you should have collected. And if you shipped out of state primarily, that can bring the amounted owed to zero. At least that’s how it has worked every year for me. Although it’s still a pain to have to itemize every set and whether or not it was sold in or out of state and how much sales tax was paid on it originally.

Also be prepared for self employment tax (social security x2 since you are employee plus employer) and Medicare taxes. And your LEGO profits will be taxed at your marginal tax bracket as additional ordinary income. 

It’s good you are asking. If you have good documentation and do everything by the book, it’ll take time, but it’s not terribly complicated. I use turbo tax and have never needed a professional. But I also did lots of research into the tax laws and keep meticulous details of my purchases and sales in a spreadsheet that I update on each transaction.  I then create a new spreadsheet every year that has all of my itemized paypal transactions — so that the figure PayPal sends to the IRS is fully accounted for. 

[mizeur]

17 hours ago, TheBrickClique said:

And your LEGO profits will be taxed at your marginal tax bracket as additional ordinary income. 

Any LEGO she's bought between 2011-2015, and some from 2016 depending on when they were bought & sold, can be treated as a long-term capital gain while sales of items purchased less than a year ago get treated as short-term capital gains and taxed as ordinary income, no?

Edited December 20, 2017 by mizeur

[justapilgrim]

Any LEGO she's bought between 2011-2015, and some from 2016 depending on when they were bought, can be treated as a long-term capital gain while sales of items purchased less than a year ago get treated as short-term capital gains and taxed as ordinary income, no?

We report?

[steveviscious89]

Are you not allowed to only count the profit as income? I mean the sets cost you something to begin with so I don't think you profited 40 grand.

[mizeur]

6 minutes ago, steveviscious89 said:

Are you not allowed to only count the profit as income? I mean the sets cost you something to begin with so I don't think you profited 40 grand.

You should report your cost basis and expenses as well as your revenue.

[TheBrickClique]

18 hours ago, mizeur said:

You should report your cost basis and expenses as well as your revenue.

Correct.  It's all 'bout that basis, 'bout that basis.

Regarding the treatment as a collectibles versus business inventory, collectibles get a federal long-term capital gain rate cap of 28%.  If your marginal tax bracket is above that, then you would benefit from treating it as a collectible.  If below that, then there is no difference.  State laws on capital gains vary.  For California, for example, all capital gains and loses are taxed at your maginal rate so it doesn't matter.

You wouldn't pay self-employment tax on your collectible gains, but if you are considering using the 28% bracket versus your higher marginal tax bracket, then you've likely already hit your cap for the social security portion.  Also, if your income is high enough, Obama care has a 3.8% tax present waiting for you on your collectible gains.  So, it's likely a wash.

So, certainly you could treat LEGO investing as collectibles.  I know from my situation that I would benefit very little -- if any -- so it's easier just to treat the whole thing as business income. 

Definitely a YMMV

I'm also not sure how the expenses work out for collectibles.  I.e. suppose 100% of your sales are considered long-term capital gains on collectibles.  I understand you can deduct sales expenses, shipping, fees, etc...  But can you then expense utilities, gas mileage, etc... since these would have to amortized across all items unless you can say you drove 15 miles to TRU specifically for that set?

Which reminded me -- don't forget you get to deduct for that mileage driving to all those stores.  In my spreadsheet, I have a purchase date and store for every set.  So, I sort them by date and store and then use google maps to tell me the distance between stores (you memorize them after awhile).  From there, you can figure out how many miles you drove that day.  I can't remember the expense ratio for mileage, but it is a decent expense to claim.

Shipping expenses are pretty nebulous when it comes to packaging.  You can figure out the cost of a box, the cost of a packing peanut, the cost of a foot of tape, or the cost of a square foot of bubble wrap or that adhesive label.  There are a couple ways you can handle these costs.  Either expense them at the time of purchase or amortize them per shipment.  I preferred the latter because I package everything in advance -- sometimes the sets sit in a box for years.  Since I was starting off slow, I didn't want to have a big shipping expense from buying lots and lots of different shipping boxes in different sizes with very little sales to offset them (IRS red flag).  So, I studied the shipments costs and the shipping supplies cost and came up with a factor (25% for me) that I multiply my shipping costs against.  So, if I ship a package for $10, I'll put $10 in my shipping expenses for the year and $2.50 in my shipping supply expenses.  I checked it again this year and it is holding up fairly well.  If I was to continue this business for another ten years now that I've got a fairly decent of sets going out each year and shipping supplies being bought to replace used supplies fairly regularly, I'd likely switch to expense the supplies when they were bought.

Purchases with gift cards are another tricky accounting bit.  You *should* adjust your cost basis by any discount from the gift card used.  If you are only holding the gift card for a short time, you could expense the gift cards and then add then leave out the purchase price from the part of the purchase from a gift card.  For example, you buy a set for $50 and use a $40 gift card that you paid $35 for.  You expense $35 as a business expense and adjust your cost basis for the set to be $10.  If you are buying and selling in different years, you might be better off not expensing the card and just reporting a cost basis of $45 when you sell the set.  As a business expense, the math is a wash.  Back to the collectibles, it would come out differently since the capital gains would be off of $10 versus $45 -- assuming those rates are different than your business expense rate.

You *should* also adjust for store rewards and credit card rewards.  I.e. you made an effective 8% in TRU rewards by using your TRU mastercard to purchase the item.  Then, when you get that $20 reward and use it to buy diapers, you *should* adjust your cost basis by -8%.

People who get into this is as a side business don't realize how messy the taxes can actually become.  And, honestly, it's one of the reasons I'm scaling back my operations after this year.  When you spend as much time accounting for and filing taxes as you do shipping items, then you realize how little you are making for your effort.  I did understand what I was getting into because I had done some other ebay businesses before LEGO, but I expected the gains to make it worthwhile for years to come...

[conceptmachine]

I'm in the exact same situation as you.  Congrats in starting to get rid of it.  I have a basement full, the same as you, with many large sets.  I'd like to just have someone get a uhaul and take it all out of here. I'd sell for no profit at all.  I have about 100K into them I think.  Started in 2011 but also have bought a few sets this year.

[Jackson]

52 minutes ago, conceptmachine said:

I'm in the exact same situation as you.  Congrats in starting to get rid of it.  I have a basement full, the same as you, with many large sets.  I'd like to just have someone get a uhaul and take it all out of here. I'd sell for no profit at all.  I have about 100K into them I think.  Started in 2011 but also have bought a few sets this year.

What state are you in? I'm sure someone would like to help you.

[conceptmachine]

I'm in Iowa.  My stuff is stored in a couple different locations.  I don't want to part some of it, its all in one sweep, otherwise people will cherry pick the best sets at MSRP, I want it all gone.

Tempted to haul it all to goodwill to tell you the truth. Not sure on what I can do for taxes, wish I could write off 100K

Edited December 21, 2017 by conceptmachine

[donehoarding]

This is a really late and random question, but I was just looking at my taxes from last year and the previous year since starting this cleanout. Both years at my normal employment I made over the 128k social security tax cap.

In 2017 the professional tax person (H&R Block) had me pay the 12.4% self employment tax (as I am the employer and employee) on all my sales

In 2018 it looks like the a different tax person (Jackson Hewitt) did not take out the 12.4% self employment tax as I was already above the 128k cap from my normal job.

Any idea which one if these is correct? It's clear to me one of these needs to be amended... but I can't gather heads or tails which one is correct. Are you still subject to the 12.4% even if you're already over the 128k cap from your normal employment?

Thanks again

[brickvoyeur]

The cutoff has been raised again and is now $132,900

You only pay up to the cutoff. This includes your normal wages, and self employment income.

So if your normal income is 100k, and your self employment income is 50k, you pay the on the first $32,900 of your self employment for the social security tax. You pay the medicare tax for every penny though.

In 2017 your taxes were done wrong, and you should send an amended form correcting that.

 

Or you could just take the advice I was given when starting this journey. (not recommended):

Edited June 24, 2019 by brickvoyeur

[MarleyMoose]

1 hour ago, brickvoyeur said:

Unless you live in Massachusetts and I believe 1 other state. If you sales exceeds $599 you're getting a 1099k.

 

[Pebble&Park]

Tax emazion

Sent from my SM-G975U using Brickpicker Forum mobile app

[Huskers1236]

14 hours ago, Pebble&Park said:

Tax emazion

Sent from my SM-G975U using Brickpicker Forum mobile app
 

[RightDwigt]

Sorry to be a necromancer and revive this thread, but has anyone else had their enthusiasm tempered regarding this topic? As a part timer, tax season is always a damper. I mean, I'm still making money, but Uncle Sam gets about 1/3 of my profits. To be clear, It's  our duty and I am not saying we shouldn't pay taxes. It just makes the already thin margins even less exciting. Guess I will continue to raise my "minimum" margin to ensure I stay ahead. 

[keymomachine]

1 hour ago, RightDwigt said:

Sorry to be a necromancer and revive this thread, but has anyone else had their enthusiasm tempered regarding this topic? As a part timer, tax season is always a damper. I mean, I'm still making money, but Uncle Sam gets about 1/3 of my profits. To be clear, It's  our duty and I am not saying we shouldn't pay taxes. It just makes the already thin margins even less exciting. Guess I will continue to raise my "minimum" margin to ensure I stay ahead. 

I started tracking mileage for my car usage this year and also deduct the use of my house as storage space (home office deduction). Granted Self-Employment tax of 15.3% plus 12+% income tax is going to take a pretty big bite regardless.

[landphieran]

24 minutes ago, keymomachine said:

I started tracking mileage for my car usage this year and also deduct the use of my house as storage space (home office deduction). Granted Self-Employment tax of 15.3% plus 12+% income tax is going to take a pretty big bite regardless.

Taxes suck. It often makes it seem like working extra hard to squeeze out some extra cash isn't worth it. I used to operate on a very lean model with very few expenditures. I since have changed that methodology and take advantage of any tax break i can.

1. Increased 401k allocations. Since you are now an employer and employee you can put 25% of your revenue or a max of ~50K in your 401K as an employer. (Do this, its tax deductible).

2. Buy nice equipment that makes your life easier: monitors, laptop, docking station, printing station, nice desk, chair etc.

3. Take advantage of government loans. Yes i'm talking about SBA relief loans. They are 3.75% interest and don't have to be start being paid off for a year. This is free capital. The government just handed you a free 15% on what ever your loan amount is.

4. Rewards miles, rewards points -> use these for personal expenses 

5. Enjoy the fact you could lose your job and still stay afloat for a while.

 

[RightDwigt]

Here's another question for anyone interested in the tax subject: how many of you treat this as "hobby income" vs "investment income" vs "self-employed (schedule C)"? I will of course take my specific situation into account and discuss that with a CPA, but I wanted to see what you all are doing. Personally, I make money from a combination of clearance resales, selling old sets, and some flips but by and large still spend more money in total building the collection. The only reason I sell is to buy more LEGO. I want to classify this as a hobby, still realizing that my hobby income is taxable, but am curious as to your thoughts. We are paying taxes either way and the figures work out to be about the same either direction (I've calculated) but I also want to do it right.

[TheBrickClique]

Self-Employed (Sch C).  If you do grow your LEGO business, you'll have more flexibility down the road.

Make sure to keep a careful inventory of everything.  When it comes time to sell, you'll have a hard time finding those Toys-R-Us purchases in your online transaction history...

Every box, polybag, promo, cloth tote bag, that you will ever think of selling should be a line in a spreadsheet.  Note how much it cost to acquire -- including sales tax and shipping costs.  Put a sticky note or label on that set to match an inventory number in the spreadsheet.  When you sell it, note how much it sold for, and how much your shipping expenses were.  Also note any paypal fees, etc... for the transaction that reduced your profits.  I expense my ebay fees since they are a little trickier to assign especially when you have a renewing buy-it-now that's been on a set for 24 months.

If you build one for yourself, make sure you build the "one" you spent the least on!  Save those low-profit sets for the ebay buyers.  If that means some sticky notes fall to the ground due to the humidity and have to be randomly reassigned, that's a shame

 

[redcell]

5 hours ago, RightDwigt said:

Here's another question for anyone interested in the tax subject: how many of you treat this as "hobby income" vs "investment income" vs "self-employed (schedule C)"? I will of course take my specific situation into account and discuss that with a CPA, but I wanted to see what you all are doing. Personally, I make money from a combination of clearance resales, selling old sets, and some flips but by and large still spend more money in total building the collection. The only reason I sell is to buy more LEGO. I want to classify this as a hobby, still realizing that my hobby income is taxable, but am curious as to your thoughts. We are paying taxes either way and the figures work out to be about the same either direction (I've calculated) but I also want to do it right.

Schedule C.  Investment income doesn't work...I've looked into that before.  There's a trick you can do if you set up a LLC and choose for it to be taxed like a S-corp...you can save like 6%-7% on any money that you pay yourself as wages for running the business, but it's a total PIA...I did it for one year and gave it up because the hassle wasn't worth 6%-7%.

[House Schubert]

The S-Corp benefit is that you can pay yourself a "smallish" salary, (and half of what would be self-employment tax is an expense of the company,) but then also pay yourself draws that aren't taxed as self-employment tax, only income tax.  But, only worthwhile if total compensation is large enough.

Shouldn't be that hard to track if you are using QB, and have a good CPA. 

[Hardwired]

On 6/18/2020 at 12:48 PM, landphieran said:

Taxes suck. It often makes it seem like working extra hard to squeeze out some extra cash isn't worth it. I used to operate on a very lean model with very few expenditures. I since have changed that methodology and take advantage of any tax break i can.

1. Increased 401k allocations. Since you are now an employer and employee you can put 25% of your revenue or a max of ~50K in your 401K as an employer. (Do this, its tax deductible).

2. Buy nice equipment that makes your life easier: monitors, laptop, docking station, printing station, nice desk, chair etc.

3. Take advantage of government loans. Yes i'm talking about SBA relief loans. They are 3.75% interest and don't have to be start being paid off for a year. This is free capital. The government just handed you a free 15% on what ever your loan amount is.

4. Rewards miles, rewards points -> use these for personal expenses 

5. Enjoy the fact you could lose your job and still stay afloat for a while.

 

Just be careful how you spend any funds from a relief loan.  If you are looking for loan forgiveness this is particularly important. 

[redcell]

9 hours ago, House Schubert said:

The S-Corp benefit is that you can pay yourself a "smallish" salary, (and half of what would be self-employment tax is an expense of the company,) but then also pay yourself draws that aren't taxed as self-employment tax, only income tax.  But, only worthwhile if total compensation is large enough.

Shouldn't be that hard to track if you are using QB, and have a good CPA. 

And aren't lazy about bookkeeping like I am.