I was going to title this article about taxes something more fantastical, like “How to Cast Magic Cards On Your Taxes” or something really cringey that would force you to quietly deride my incorrect usage of various MTG terminology. But taxes are no laughing matter, and the IRS has recently turned an eye to the hobby/trade.
Yes, I’m sorry to say that thanks to a booming baseball card market, NFTs, and other TCGs, the IRS latently figured out that there was a segment of earnings eluding their taxy clutches. As a result, most MTG sellers are going to be required to report card sales on their Individual Income Tax Returns for the first time ever. Naturally, this extends to other TCG and sporting card transactions–I’m merely using Magic: The Gathering as our primary example. Because MTG rocks.
So let’s take a look at what you need to know and how to move forward so you stay on the IRS happy list and avoid paying more than you have to.
DISCLAIMER: First, please remember: I am not your legal or tax representative, and this should not be considered official tax advice. It’s merely a conversation about tax strategies. For advice, guidance, and representation, please seek out a local trusted tax professional. Not one of those pop-up outfits in a strip mall either, spend a little extra coin and do it properly.
What Is Likely to Change With My Taxes?
Let’s talk MTG taxes! So you’ve sold some cards over the past year, just as you have year over year and nothing has ever come of it tax-wise. After all, seasoned sellers could tell you that Third Party Settlement Organizations (TPSOs) were only required to report sales over $20,000 in a single calendar year to the IRS (or if you had more than 200 transactions). If you tipped either threshold, you would have received a 1099-K form and you’d be under the gaze of the IRS.
Most of you didn’t fly that high with a single TPSO, so this wasn’t really a scary prospect. In fact, I have a sneaking suspicion that most of you didn’t report any TCG sales activity on your taxes at all.
That is all about to change as of Tax Year 2022. Starting in 2022 and going forward, TPSOs are now required to send you a 1099-K if you have sales (or services) in excess of $600 for the entire calendar year.
(Update: The IRS recognized how problematic the law was and delayed it so it will take effect for Tax Year 2023. This information is still going to be vital soon, so read on.)
That means, come January-March each year, a whole bunch of you will be receiving Form 1099-K for MTG sales via mail. Maybe several of them. DO NOT IGNORE ANY 1099-K FORMS YOU RECEIVE.
The IRS also gets copies, and they will NOT let it go. You must save all 1099s and report them on your taxes–or you’ll be subject to big penalties and interest.
Yes, your taxes are going to change. Don’t panic. This isn’t as scary as it sounds. But it’s time to get organized and start making a plan.
How to Report MTG Sales On Your Tax Return
If you didn’t know it already, your MTG card sales have rendered you–yes, you in your hoodie sweatshirt and scuffed sneakers (no judgement)–a business. A walking, breathing business. In fact, you are almost certainly a Sole Proprietor. You don’t need a business name or license. You don’t necessarily need a special bank account, nor do you need an office or employees. You don’t pay yourself, because it’s just you. You are your business. Your pockets, full of pack wrappers and dice, are the business’s pockets.
So, congratulations, in the event that this is a revelation to you.
Now what? When you file your annual Income Tax Return(s), you should include a form called “Schedule C: Profit Or Loss From Business“. Your business name can (and probably will be) simply your own name. On this “schedule” you will report all income and expenses from your business.
Your TCG Card Income
Let’s start with the money coming in: The IRS expects you to not only report income based on your 1099s, but also any other income that didn’t get reported to them. That’s right, technically you’re supposed to report pretty much every nickel you earn from January 1 to December 31. (We’ll talk about cash versus trades and packs just a little later.) In other words, the bare minimum income you better report is what the IRS knows about. They don’t forget. As for the rest? Be good little monsters and report it all. I mean, I would never advise anyone to “forget” about small bits of income that the IRS doesn’t know about.
Once you’ve figured out the amount of MTG card sales income to report on your tax returns, some of you might be tempted to throw your arms in the air and declare that you’ve fulfilled your tax burden, then jump through a plate glass window and run for the hills.
That is a bad idea. And not just because of the glass window thing. In no way should you be stuck paying self-employment taxes on ALL of that income. After all, you probably had a lot of expenses related to your MTG card business, and like any businessperson would tell you, you need to shrink your tax bill by deducting legitimate business expenses. Let’s take a look.
Expenses: Cost of Goods Sold
The first type of expense you absolutely need to deduct is, obviously, your Cost of Goods Sold (COGS)–which is basically the cost of the cards you sold. Most of the time, you aren’t getting that cardboard for free! It’s time to dust off your spreadsheets and calculate your inventory numbers for the calendar year. Here is what you will need:
To start with, figure out the value of your inventory as of January 1. The value is the total amount you paid for the inventory-–not its worth. Only include cards that you are aiming to sell soon-ishly.
Then total how much money you spent on new inventory (cards) during the year, January 1 to December 31. Don’t include the cards you bought just for yourself; your intent should be to resell them in the not-too-distant future.
Also add up your shipping expenses, including shipping supplies.
Lastly, calculate the amount of your inventory on December 31. Again, use the amount you paid, not its worth. This will also end up being next year’s Beginning Inventory number!
COGS = Beginning Inventory +
Purchases (and Other Costs) – End Inventory
Example: As of Jan. 1, you have cards you’re ready to resell that you originally paid $800 for. During the year, you spent another $500 on cards you intend to resell hopefully soon. Plus, you paid $68 to pack and ship some cards during the year. At the end of Dec. 31, you still have cards in your inventory that you had paid $750 for.
COGS = $800 + 500 + 68 – 750.
Your COGS for the year was $618.
Expenses: Standard Business Expenses
Phew! Your COGS amount might help eat into that tax bill, but there is more to be done. We’ve accounted for your cards and some shipping costs, but presumably you shelled out a lot more than that for your businss.
Remember that your card sales couldn’t have happened without platform fees, your cell phone, phone chargers, some travel, or trips to the bank and post office (keep track of your mileage on these trips). Many of you probably needed binders, sleeves, printer paper, toner, software, storage boxes, and pens. A few of you might even have purchased things like a safe, jeweler’s loops, con tickets, a new laptop, or memberships with certain websites. There are a lot of different legitimate business expenses that may apply to a TCG card dealer like you, so take the time to investigate what can qualify for a tax deduction.
If you’re wise, you’ll track all of your tax-relevant expenses on a spreadsheet or list of some sort from the first day of the year. Save any paper receipts in case there are any questions later on.
If parsing any of this makes you nervous or unsure–good! That means you are honest. Tax professionals spend a lot of time going to school and staying up-to-date on stuff like this. Most of them couldn’t tell you the value of a Mox (or what the frig a Mox is), just like you might not be sure if you can claim a “Home Office” deduction. Don’t be afraid to reach out to a tax professional for guidance. His/Her wisdom might even pay for itself in tax savings.
Inventory, Packs, and Trades: All the Little Things That Might Trip You Up
We’ve tackled the basics so far. You have at least some idea of the income and expenses that will comprise your Net Profit from your TCG card dealing business. But if you’re as nerdy as I am, you surely have a whole bunch of “what if…?” questions based on special circumstances, schemes, and deals. Let’s explore some of the more nuanced issues you might bump up against.
What About Packs or Boxes I Bought?
As you’re about to crack some new packs, the businessperson inside of you may wonder about how this will impact your inventory (and COGS), especially if you might keep or trash some of the cards you open.
First, make note of how much you paid per pack (divide up the booster box cost by the number of packs inside that you are cracking). Now, for the packs you actually crack, you are going to take the number of cards out of each pack that you are going to resell (even the bulk, if it’s headed to market), and divide that number by the cost for the pack.
Example: You buy some packs, paying $2.50 per pack. You crack open the first pack and find that you want to resell 12 of the 15 cards (let’s say 3 of them are too good to not keep for your personal decks). That means you are adding 12 cards to your inventory, and their cost was 21 cents each (.21 * 12=2.50).
It doesn’t matter if one of the packs had an amazing mythic foil worth a ton. Your cost was only 21 cents each for that pack. If you were only going to resell 2 cards out of that pack, your cost from that pack was $1.75 per card–even if you’re certain you can only resell them for $1.00 each.
Of course, you could always break down a “per card” cost paid by the box, instead of by the pack. Just be consistent and set aside anything that isn’t headed for resale.
What About Trades?
If you have a transaction that is just cards-for-cards (or something similar), follow all the rules above. Consider if the cards going in and out are for/from your personal collection or your business. If it’s the latter, you’ll need to adjust your inventory, placing a reasonable value on the incoming card(s). Try to keep track of how you arrived at the number, just in case anybody asks.
What If This is Just My Hobby?
First of all, if you’re earning enough money from card sales to receive a 1099, the IRS considers that more than a hobby. It’s a business whether you like it or not, and you are almost certainly classified as a “dealer” in their eyes.
If you haven’t received a 1099, and sales aren’t really your thing, then do not worry about Magic Cards and your taxes. Buying and small-scale trading them is a basic hobby and not a tax-triggering event.
What If I Buy Cards as an Investment?
Some of you might pick up some flashier cards, like a lovely Lotus, on speculation that the value will skyrocket in coming years. You put it in your vault and wait. Is this part of your inventory? NO.
According to the IRS, that is an investment piece–much like fancy people might collect artwork (losers). You aren’t flipping that card in the short-term, so it isn’t part of your available inventory.
When the day does come to sell it, you’ll actually report the sale not as part of your business, but as a Long-Term Capital Gain. The good news is that it’ll most certainly be taxed at a lower rate than any of your standard sales through your business. The bad news is that reporting it is slightly more complicated. So when the Lotus leaves you, call your tax pro to figure out what comes next. Until then, keep it and its cost separate from your business.
I’ve just bombarded you with a whole lot of information, and some of it may have made your brain go a bit fuzzy. Listen, you don’t need to be an accountant. Just start tracking income and (suspected) business expenses throughout the calendar year. That’s step one. And that’s a big step. Try to leave a trail of bread crumbs in case you need to justify these numbers to anyone later.
Then between now and next February, seek out a good tax professional. You may just want to chat with them in one meeting to build your confidence before preparing your own taxes. Or you may find that having a professional prepare your tax returns is the best route, because you have more important crap to do.
Once you get the hang of this over the next year or so, it’ll become old hat and you may even get excited to watch your business grow and progress. Okay, maybe not. Maybe you just want to crack some damn packs, draft, and play. I respect that. Just don’t forget that the tax man cometh.
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