Sell or Donate?
If you have reached the point in your life when it is time to consider disposing of your card collection, you should first consider your choices. You could sell the cards, choosing among several methods to do so. A sale would result in cash to you, and an income-tax liability, although you would have the cash to pay the tax. Or you could donate your cards to a public charity and receive a tax benefit, i.e., a reduction in your tax liabilities, which is like receiving cash. Which is better?
There are three main factors that influence the financial results of your choices:
- Your Cost Basis:
Generally, this is the costs you paid to acquire your cards. If you have paid to professionally grade the cards, then the grading costs would increase your basis. You must pay income taxes on your gain from the sale of your cards. The gain is computed as your net sale price minus your cost basis. If you have cards that you bought when you were a child, the cost basis is likely very low, maybe even a penny for each card. If you inherited a card, your basis for determining gain is the value of the card when you inherited it. If you received a card as a gift, then you take the basis that the person who gave you the card had. If you cannot prove what your basis is, then your basis will be presumed to be zero. If your cost basis is low, then a charitable gift of the cards is more attractive.
The unrealized gain is never recognized. In other words, the donor may deduct the full fair market value, yet does not report any gain from the increased value of the card over its cost basis.
— Your marginal income-tax rates.
Your tax rates are important for two reasons. First, you should know what tax rate you would be paying on your gain from a sale. If you held the cards for more than a year, and are not a dealer, you would qualify for federal capital gain rates. However, collectables have a special capital gain tax rate, which is 28% (or your marginal income-tax rate, if lower). In addition, if your adjusted gross income is over $200,000 ($250,000 if married filing jointly), the federal Net Investment Income Tax will apply to your capital gains at a rate of 3.8%, so the total federal rate would be 31.8%. Most states also have an income tax, and the tax rates vary. They could be as high as 13.3% in California, although for most people the rate is much lower. Second, the cash benefit of your income-tax deduction for a charitable gift depends on your marginal income-tax rates. Federal rates range from 10% to 37% A married person with taxable income of $70,000 would have a 12% federal marginal tax rate, while the same person with taxable income of $90,000 would have a marginal tax rate of 22%. Your state marginal rate should also be considered. If your combined marginal rates are say 30% and you itemize your deductions, then your donation of a card worth $100 would ordinarily reduce your income taxes by $30.
—Your selling costs and price discounts.
If you decide to sell your cards, it is unlikely your net proceeds would be as much as the cards are worth. You could sell your cards to a dealer, who will pay you wholesale prices, which typically are 40% to 60% less than their retail value. You could sell your cards on eBay, and pay the eBay and PayPal fees of about 13%. However, without the presentation, advertising, and reputation of an established eBay card dealer, your sale price will likely be 20% to 30% less than what a collector would pay to a trustworthy dealer. You could avoid the commissions and sell your cards on craigslist, but that is such a limited market for collectors that the discount would likely be as great as it would be selling to a dealer. If you have a collection of sufficient value to be acceptable to either an auction house or an established internet consignment dealer, then your sale price will be close to market value. However, you will have commissions to pay, typically about 15% to 25%. Thus, if you sell your cards, you will likely net only about 40% to 85% of their value, and then you must pay taxes on your gain.
As mentioned above, if you donate your cards, have held them for more than a year, are not a dealer, and itemize your deductions on your tax returns, you will get a tax benefit (a reduction of your income taxes) equal to the value of the donated cards multiplied by the sum of your federal and state marginal income tax rates. Here is an example: Say you have a card worth $100 that you donated to the museum. You are entitled to an income tax deduction equal to the card's fair market value when the gift was delivered, which in this example is $100. If your combined federal and state marginal income tax rates are 30%, then your tax benefit would be $30. If you live in a high-tax state like California, where your combined federal and state tax rates could be as high as about 50%, then the tax benefit would be about $50. This $30 to $50 tax benefit is like tax-free cash in your pocket, as it will increase your tax refunds or decrease the amounts of tax due. If your donation is over $5,000 in value, then you will have to pay for a formal appraisal of the donated cards, which would reduce your cash benefit somewhat.
If, on the other hand, you decide to sell your cards, you have several choices. If you have an eBay account, a good eBay feedback history, have the time and equipment to scan the cards so that they can be professionally presented, and the time to pack and ship to the winning bidder, you might get an eBay sale at 90% of their fair market value. Your eBay and PayPal fees would be about 13%, so you would realize the gross amount of about $78 on the sale of your $100 card. You must pay income tax on your gain. Say that your cost of the card was near zero, or that you do not have the records to prove your cost so the IRS presumes your cost was zero. So you would have a $78 gain. If your combined federal and state marginal rates are about 35%, then your after-tax cash from the sale would be about $50.70. Remember, collectables do not qualify for the favorable capital gain rates. Their special federal tax rate is 28%.
If you are not set to conduct an effective eBay auction, then you probably would have to sell your cards to a dealer. Naturally, a dealer must buy at wholesale prices, so he can make a profit when he resells the cards. A typical discount from value might be about 40%. This would result in $60 of proceeds from the sale of the $100 card. If your combined marginal tax rates are 35%, your net after-tax cash would be about $39, which is actually less than you would realize if you donated the card and your combined marginal tax rates were greater than 39%.
Another possibility would be to contract with a dealer to sell your cards on consignment. You would take the risk on what sale price would be realized, but you get the benefit of the dealer's reputation, advertising, and presentation, which may provide a selling price closer to value. The trade-off is that the dealer's fees will be more than if you sold the cards on eBay yourself. So say the dealer sold your card for $100 and his fees were 20%, so you get a check for $80. If your tax rate is 35%, you would net about $52.
Please refer to our tax primer, or consult with your tax advisor, regarding certain limitations on charitable deductions. Remember, you may deduct the value of your cards only if the charity uses the cards for its tax-exempt purpose; otherwise you may deduct only your cost basis. Cards donated to the American Baseball Card Museum's collection will be used for its tax-exempt purpose; cards donated to Goodwill or the Food Bank will not.
As you can see, depending on the factors described above, you might net a little more money by selling your cards, even after considering selling expenses, price discounts, and taxes. But would the benefit of a few more dollars surpass the joy you would feel by donating your collection to a baseball card museum where it will be appreciated by collectors, baseball fans, and the public?
Assume your card is worth $100 and your basis is $0. Also assume that your marginal capital gain rate for collectables is 35% and that your combine federal and state marginal income tax rate is 45%. This example compares three choices: you donate the card to a tax-exempt charity that uses the card for its tax-exempt purpose, you sell the card to a dealer, or you consign the card with a reputable internet card dealer.