cost basis

Technical topics regarding tax preparation.
#1
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Lets say you bought a designer handbag for $700 three years ago. You used the handbag personally until you sold it to a friend for $500 this year.

Was the cost basis of the handbag at the time when you sold it to your friend still $700? Or should it be the FMV of it at the time of the sale?
 

#2
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Basis is $700. The loss is non-deductible.
 

#3
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Everybody I asked this question wanted to know how come did I need to know the basis of the handbag. Not a one of them asked me when or where I had gone out with it. ;)
 

#4
lucyko  
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Change the facts a little and say you sold the handbag for $1,000.Now you have a LT capital gain of $300 subject to capital gains tax rate of 0% ,15% or 20$ . Yes a handbag is considered a capital asset .
 

#5
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Is the handbag a collectible taxed at 28%?
 

#6
EZTAX  
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69ranchero beat me to it! Inquiring minds want to know!
 

#7
lucyko  
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After reviewing the IRS definition of collectibles my opinion is no .
 

#8
Nilodop  
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I want to know whether BestQuestion has found something contrary to the answer by SumwunLost.
 

#9
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After further discussion with the taxpayer, here are more details.

He purchased a lot of expensive brand name items for his own collections through the years, such as handbags, shoes, etc. But then in 2018, perhaps the interest had faded away, he decided to sell all of them. And he incurred an overall loss.

In this case, is the loss deductible considered capital loss? Or is it considered personal loss and therefore not deductible?
 

#10
sjrcpa  
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Sounds personal to me.
 

#11
lucyko  
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I agree with sjrcpa. Your description of the activity seems to fit a "collector ". A collector is one who collects as a hobby with no profit motive . They typically just purchase items for their collection and never engage in periodic sales . Ultimately when they sell their collection ,and if it is a loss , are not eligible for capital losses .

Contrast that to an "investor " who has a profit motive and actively buys and sells portions of his collection . This person is eligible for capital gains and losses upon sale of his /her collection .

This distinction between collector and investor is probably going to come down to facts and circumstances . There are a lot of good articles on the internet on this topic .
 

#12
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Sounds personal (and nondeductible) to me, too.

But wait, I'm not through!! 8-) ;) 8-)

When "in 2018, perhaps the interest had faded away, [and] he decided to sell all of them[,]. And he incurred an overall loss," and it seems quite possible - c'mon somebody, prove me wrong here! - that the gains on the items that had appreciated are taxable capital gains, while the losses on the other items are nondeductible. Anybody want to try to say the gains and losses get netted and then the net is what gets reported?
Last edited by Spell Czech on 27-Aug-2019 5:55pm, edited 2 times in total.
 

#13
JAD  
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I have a collection of shoes, and I can assure you that that terminology does not qualify me to treat these as anything other than items that I purchased for personal use.

Losses - personal, nondeductible, unless the items are being displayed in some fashion museum and not enjoyed when dressing up for dinner.
Gains - I agree with Spell Czech, taxable. No netting.
 

#14
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If it is *net* collectible gains that are taxed at a special rate, doesn't that of necessity require that collectible *losses* be deductible up to some point, so as to be allowed to reduce gross collectible gains to net collectible gains?

Up to what point are collectible losses allowed?

And where's that in the tax law?
 

#15
Nilodop  
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Anybody want to try to say the gains and losses get netted and then the net is what gets reported?. More likely, nothing gets reported at all.
 

#16
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The word "recognized" slipped my mind for a few picoseconds.
 

#17
JAD  
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If it is *net* collectible gains that are taxed at a special rate, doesn't that of necessity require that collectible *losses* be deductible up to some point, so as to be allowed to reduce gross collectible gains to net collectible gains?

Sure, if they are collectibles. My point about the shoes was that I think that they are personal items. Personal losses = n/d. Personal gains = taxable.
 

#18
Chay  
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Spell Czech wrote:If it is *net* collectible gains that are taxed at a special rate, doesn't that of necessity require that collectible *losses* be deductible up to some point, so as to be allowed to reduce gross collectible gains to net collectible gains?

The gains are recognized under section 61 while the losses are allowed as deductions only to the extent provided in section 165. If the gains and losses are indeed separate, each section is applied separately.

This means the only way to achieve the result you want is to aggregate the sales into a single transaction so that there aren't any separate gains or losses. The concept is not entirely unheard of — we do have the gambling session rules, after all. But is it valid to stretch that concept any further without specific guidance from the IRS?
 

#19
Nilodop  
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The concept is not entirely unheard of — we do have the gambling session rules, after all. But is it valid to stretch that concept any further without specific guidance from the IRS?. Well, not specific to the purses and shoes, but surely room to analogize from a few unrelated sources:

TAM 200902011 - A taxpayer may elect to account for its assets subject to § 168 (MACRS) in general asset accounts, as authorized by § 168(i)(4) and the corresponding regulations. Taxpayer asserts that it generally follows these regulations; however, it has never made an election to do so.
Section 1.165-7(b)(2)(i) provides, in part, that a business or investment loss is determined by reference to the single, identifiable property damaged or destroyed. Thus, for example, in determining the fair market value of the property before and after the casualty in a case where damage by casualty has occurred to a building and ornamental or fruit trees used in a trade or business, the decrease in value is measured by taking the building and trees into account separately, and not together as an integral part of the realty, and separate losses are determined for such building and trees. Section 1.165-7(b)(2)(ii) provides a special aggregation rule under which improvements are considered an integral part of real property that is not used for business or investment.
Under the § 165 regulations, a casualty loss is determined by reference to the "single, identifiable property damaged or destroyed." The language of the regulation itself supports a relatively narrow construction of the term:
Therein, the term ‘property’ is clearly adjectivally defined and limited by the phrases ‘single identifiable’ and ‘damaged or destroyed’. . . . These descriptives or modifiers unmistakably constrict the permissible interpretation of ‘property,’ rather than broaden it.
Weyerhaeuser Co. v. United States , 32 Fed. Cl. 80, 100 (1994), aff’d in part and rev’d in part , 92 F.3d 1148 (Fed. Cir. 1996). An example in the regulations provides that where damage by casualty has occurred to an office building, land, and ornamental plantings, the decrease in value and the basis limitation are both measured by taking the building, land, and plantings into account separately, with separate losses being determined for each. § 1.165-7(b)(3), Ex. (2). 6

**********
6 By contrast, taxpayers who sustain a loss to personal-use real property, such as a home, may aggregate land, buildings, and plantings in determining their loss. § 1.165-7(b)(3), Ex. (3).
Summarizing, the determination of the "single, identifiable property" involves the application of a number of factors, none of which is dispositive, to arrive at a reasonable unit of property taking into account the nature of the casualty and the facts and circumstances of the particular case.

Section 1231. The essence of the tax treatment starts with netting gains and losses.
 

#20
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New Development.

The taxpayer has actually received a Form 1099-K on the sales since he took credit card payments from his friends and relatives.

If the venture is considered personal, I was thinking to report it on Schedule D and noted the loss as non-deductible personal loss.

But would that cause a matching problem and a CP 2000 to deal with down the road since the IRS computer will probably look for the 1099-K amount on a Schedule C?
 

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