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...