This week's article is about taxes.
Okay, wait — please don't click away yet. I know you're on a website with hundreds of amazing articles about powerful decks and awesome spells, any of which is going to be more exciting than reading about something called a 1099-K. I know that taxes exist at that horrible intersection between scary and boring that will make your heart race even as your eyes glaze over. Believe me, I know all of this.
But here's the thing: there was a massive change in the US tax code that you need to know about if you buy and sell things online, Magic cards included. You might not have had to worry about paying taxes on small-time Magic sales before, but it's impossible to avoid now. At this point, you only have two choices: start planning for it now, here at the start of 2022, or find yourself faced with a massive pickle when your tax forms show up in the spring of 2023.
I write this column to help y'all make Magic a more affordable game. That involves knowing which cards to buy and when, as well as which cards to sell and when. As of the start of 2022, that also involves making sure that you are only paying your fair share of taxes to the government, and not a dime more. Money saved is money saved, whether it's a savvy buying decision, a killer sales opportunity, or making sure that your taxes are in order.
To that end, I suggest reading this article now, paying special attention to the techniques I recommend for tracking your sales and inventory throughout 2022. Then I want you to bookmark this article so you can come back here in a year when it's time to file your 2022 taxes. You're going to need to do some work now, while the rest will be more useful later. Either way, don't just click away from this piece. Taxes may be scary, but it's important to get them right. Avoiding the problem now is just going to make things difficult — and cost you money — later on.
There are two things we have to get straight before we begin.
First, I want to be clear that I am not a tax professional of any kind. I have no experience in the field, no certifications, and no advice that I would put up against that of an actual professional. My qualifications for writing this article basically come down to the fact that I've already been through this process before, since I sell enough online to warrant paying 1099-K taxes, and I've done quite a bit of research on the topic. That's it.
My suggestion to all of you is to make this article the beginning of your tax prep journey, not the end. You should consider either hiring a CPA or at least buying a book or taking a course from someone with true expertise in the field. Don't take my advice over the advice of an actual professional, and please trust the experts. I'm going to give you the best advice I can, but it is likely to be incomplete.
Second, I want to be clear that I in no way believe that you should attempt to cheat on your taxes. I'm not going to help you circumvent the law, nor do I think you should. I honestly believe that taxes are an important part of maintaining society, even if you disagree with where some of that money goes. Plus, you don't want to mess with the federal government. They will win every time, and you will lose every time. This article isn't about trying to gain an "edge" on your taxes, just about making sure that you are only paying your fair share.
Got all that? Okay, let's get to the (relatively) fun part!
Do you know that you're supposed to pay taxes on everything that you make a profit on? No, really, you are. Buy a video game for $1 at a garage sale and sell it for $5 at your garage sale a decade later? You technically owe taxes on that $4 profit.
Of course, most people don't pay taxes on garage sale income. For one thing, most things that you sell at a garage sale are depreciated household goods, which you likely paid a lot more for than you got for them at a sale. If you buy a dress for $40 at Macy's and sell it for $5 at your garage sale a decade later, you don't have to pay taxes on that $5 bill because it isn't actually profit. You're just recouping some of your losses.
There's also kind of a general cultural understanding that the federal government doesn't really care about you selling a broken Roomba for $20 on Facebook Marketplace. Most people who sell their used household goods at garage sales or on eBay only make a couple of sales a year, they aren't making much money, and most of these sales involve items where no actual profit was made. Because of that, they don't factor into most people's tax decisions.
How can the government make sure that folks who sell a couple of used household goods on eBay aren't dealing with complex tax forms, but people like me who are high volume profit-focused eBay sellers are paying their fair share? The IRS uses reporting thresholds. Up until 2022, the reporting threshold for individual online marketplaces (eBay, Amazon, TCGplayer) was $20,000 and 200 individual transactions. If you failed to hit either of those thresholds, tax reporting relied on the honor system, and it was up to the individual seller to tell the government how much of a profit they made. If you made at least $20,000 in gross sales across at least 200 transactions, however, the marketplace (or payment manager, like PayPal or Venmo) was responsible for reporting your gross income directly to the IRS. At that point, you had to deal with it no matter what — just like income earned from your job.
Even though everyone is required to report all of their income to the IRS no matter what, many small-time sellers didn't actually do this. They were either ignorant of the law, or they figured they could fly under the radar. Starting in 2022, however, flying under the radar will be impossible. That $20,000 threshold has been reduced to just $600, and that 200-transaction threshold has been eliminated entirely. This means that everyone who sells at least $600 worth of goods on any online marketplace — including TCGplayer — will have their sales reported to the IRS. When you start getting your tax forms in the mail a year from now, you'll also receive them from eBay, TCGplayer, Amazon, PayPal, Venmo, Facebook Marketplace, and anywhere else where you sell at least $600 worth of goods online for the duration of 2022. $600 is nothing. That's, like, ten reasonably expensive cards. My personal business hit $600 in gross sales for 2022 on January 3rd. Even if you're just idly speculating here and there, you'll hit it too.
My prediction? There will be a lot of angry, confused, and scared small-time sellers receiving tax documentation in the spring of 2023 with no idea what to do about it. That's why I'm writing this article now. You don't want to be surprised — you want to be prepared.
My guess is that some of the unprepared small-time sellers will make one of two big mistakes when they get their new tax forms in the mail: they'll either ignore them, or they'll assume that they have to pay taxes on every single dollar reported. Both decisions are going to hurt you.
First, you shouldn't need me to tell you that you should never ignore a tax form. The IRS also has a copy of each form you receive, and if your tax bill doesn't match up with the information they have, they're likely to follow up and ask why. I've never been audited (thank goodness) so I don't know how that process goes, but I don't want to find out, and neither do you.
You also don't need to pay taxes on your gross income as if it were profit. Remember: you only owe taxes on sales that were actually profitable. If you lost money on an item, you don't have to pay taxes on the money you get when you recoup as much of your lost value as possible. Business expenses also count against your overall profit. Your goal when calculating your overall tax burden is to figure out how much money you actually made, and then only play taxes on that. If you're paying taxes on money that actually represents losses, or that went to legitimate business expenses, you're losing out.
Some people think that if you declare your online income to be from a hobby on your tax form, then you don't have to actually pay taxes on it. This isn't just untrue, it's the exact opposite of the truth. If your money comes from a hobby instead of a business, then you can't deduct things as business expenses and you end up paying a much larger percentage of your gross income in taxes. You want to avoid the "hobby" tag if it all possible.
You can't just lie and say that your hobby is a business, though. In order to qualify as a business, two things have to be true about your card speculation:
The good news here is that everyone out there flipping Magic cards should be able to honestly call their side-hustle a business. If your goal is to make money when you buy and sell cards, then congratulations — you're a business. If profit isn't actually your goal, though, then you're engaging in a hobby and should file your taxes as such.
What else do you need to start a business? Honestly, nothing. The minute you sell something for a profit, bam — you're considered a sole proprietorship in the eyes of the federal government. There might be advantages to starting an LLC or formalizing your business in other ways, but those are beyond the scope of my knowledge or this article. For the purposes of the rest of this article, I'm going to assume that you're running a small one-person business (not a hobby) as a sole proprietorship.
Let's imagine that you sell $5,450 worth of cards this year on the TCGplayer marketplace. At the end of the year, TCGplayer is going to inform both you and the IRS that you made $5,450 in sales this year. You can't hide or obfuscate this number, nor should you. This is the figure that the IRS is going to be working with, and that's what you're going to have to work with as well.
But was all $5,450 of that reported income profit? I highly doubt it. You had to buy the cards, ship them, pay marketplace fees on them, etc. Our goal, then, is to figure out exactly how much of that $5,450 was actually profit so that we can only pay taxes on that smaller net profit figure instead of the whole gross profit amount.
There are two main categories of things we can look for to lower this figure: the cost you spent on your inventory, and your business expenses. Both of these things are important, and it's worth separating them out as you calculate your tax burden. That way, you can get a better sense of where your business is succeeding and where it's failing.
One good way to start calculating your inventory costs is to use a COGS (cost of goods sold) formula. This formula is fairly simple: figure out the total cost you spent for your inventory at the start of the year, add in the cost of purchase you make during the year, and then subtract the total value of your inventory at the end of the year. For example, let's say you begin the year with cards that you spent $10,000 to purchase. Not $10,000 "worth" of cards, but cards that you actually paid $10,000 for. Over the course of 2022, you spend another $5,000 on cards to sell. At the end of 2022, your inventory still has cards that you spent $8,000 on. That would put your COGS figure for 2022 at $7,000.
This is easier said than done, of course. For one thing, most of us have some pretty serious blending going on between our personal Magic collections and the Magic cards we buy as speculation targets. For tax purposes, we need to be much stricter about separating these things out. If you're buying cards for your personal collection with no intent to resell, you can't just use those shopping trips as part of your COGS calculation for your business.
Calculating cost paid can also be difficult when you purchase booster boxes with the intent to crack the packs and sell their contents. There are several ways to do this, but I generally divide the cost of the box into a per-pack cost and then split the per-pack cost among any cards within that I'm actually going to sell, valuing the bulk at $0. So, for example, if I spent $3 per pack and I open a $10 mythic in one pack, I'll put $3 as my cost paid for that mythic. If I open two $1 uncommons and a bulk rare in a second pack, I'll put $1.50 per card for those uncommons. You can do this any way you want — valuing each card in the pack at $0.20, or dividing per box — but the important thing is to make sure that the numbers add up and make sense at the end.
It can also be really hard to figure out how much you paid for existing inventory if you aren't used to keeping track of this stuff. According to most of the tax professionals I've talked to about this stuff, it's okay to go with your best guess when you don't have a hard number to input. While you are going to want as much documentation in the event of an audit, the most important thing is to make sure that you are always making a good faith effort to be as accurate as you can be. Just make sure that your records going forward are as accurate as possible, and do your best with stuff that's already in your inventory.
While you can keep track of inventory using business software, I just use a simple Google Sheet. Whenever I speculate on a card, I make a note of the card's name, the number of copies I've purchased, the amount I spent per card, and the date I bought them. Then I can just use a simple spreadsheet formula to calculate my overall inventory value. Whenever I sell a card, I cut and paste those spreadsheet lines to my "sold" page and add in the date sold and the amount I sold it for. Then, at the end of the year, I can see if my gross profits line up with what's on my 1099-K, and I can easily run a formula to calculate exactly how much I spent on everything that sold over the year.
Here's an example of what a line in that spreadsheet might look like prior to listing:
And here's what it might look like after a sale:
This spreadsheet is the heart of my eBay business, as well as any card flipping that I do. If you take nothing else from this article, this is the one thing that I think everyone should do. Not only is it the best way to track your tax burden, but it'll help you determine which of your specs were successful — and which were not.
Now that we have a sense of how much we paid for the cards that we sold during the year, we can start to calculate how much we had to spend on business expenses. This stuff adds up fast, so it's important to add into our final figures.
Yet again, the rule of the day here is to be as honest and accurate as possible. Don't lie or attempt to deduct things that aren't actually business expenses, but also don't shy away from getting credit for everything that actually is a part of your business. For example, there is a myth out there that the home office deduction (essentially, claiming that part of your home is being used for business purposes and should count as a business expense) is an audit trigger and should be avoided. I used to avoid claiming a home office deduction for myself because I was scared of an audit, even though I actually do have a dedicated home office. Turns out, this might have been an audit trigger back when home offices were rare, but it isn't an audit trigger now that home offices are incredibly common. If you have a home office that you use in part for your card flipping business, then you can claim some of that as an actual business expense.
So, what business expenses can you deduct from your gross income? Here are some of the main expenses that I calculate every year for my flipping business:
See why it's important to plan ahead? If you don't have a spreadsheet to keep track of your business expenses throughout the year, then you'll have to go digging around for all of your credit card receipts for office supplies, envelopes, postage costs, etc. You'll also probably miss out on all of your potential mileage deductions, because you really do need to be keeping a log of those throughout the year. If you do all of this, though, then suddenly you're looking at a tax burden that is much lower — and also much more accurate. Hooray! All you had to do was spend a lot of time keeping track of business expenses in order to make your Magic card addiction slightly cheaper. Capitalism is awesome!
Once you have a sense of what your tax burden is likely to be, make sure that you save about 25% of those profits so that you can pay your tax bill on time. If you're not used to paying taxes on your card flipping business and you end up making $5,000 in profit this year, you're going to owe more than $1,000 in taxes. If you can't pull that kind of money comfortably out of your savings account, make sure you plan ahead.
Make sure you save money for tax prep as well. If you don't hire an accountant and end up doing all the work yourself, you will generally need to buy one of the more advanced tax prep platforms in order to have access to all the business expense forms. I know the TurboTax version costs about $250, though there are likely some cheaper alternatives if you shop around for them.
Also, if you've never been a freelancer or small business owner before, you likely haven't encountered the wonderful world of estimated taxes.
If you're a salaried employee who filled out a W2 form, then your estimated tax burden is automatically taken out of your paycheck before it arrives at your bank account. This number is usually slightly higher than it ends up actually being, which is why salaried employees often enjoy a small tax refund every year.
Contractors, freelancers, self-employed people, etc. don't have this. When I do work for, say, TCGplayer Infinite, I send them an invoice for my contracted per-article rate, and they pay that amount directly into my bank account. At the end of the year, they tell both me and the IRS how much they paid me, and I'm responsible for paying taxes on the profits. It's very similar to how they report card sales, and they are in fact both different flavors of 1099 form.
Since nothing is automatically withheld from my paychecks, however, I don't get a tax refund at the end of the year. Instead, I end up owing the government a lot of money. Even after business expenses, it's not uncommon for me to have a hefty tax bill due in March.
Of course, the IRS doesn't like it when people owe them a ton of money at the end of the year. They'd rather have the money sooner, so they can spend it as soon as it comes in. What this means is that anyone who owes the IRS $1,000 or more at the end of a given year is going to be asked to pay estimated taxes for the following year, and those estimated taxes are going to be equal to the amount that you had to pay this year. If you owe the IRS $1,500 in taxes from your flipping business in March of 2023, they're also going to ask you to pay an additional $1,500 to cover estimated taxes for the following year.
This isn't horrible if you're used to it, because it essentially just shifts the burden up a year. If I pay $1,500 in estimated taxes for 2023 throughout 2022, then I'll be starting my 2023 tax return up $1,500. It can be a problem for first-timers, though, because the first time you have to pay estimated taxes, you're likely looking at a doubling of your tax burden that year. You don't have to pay them all right away — the payments are expected quarterly — but you do have to pay them, so keep that in mind. If you expect to make more than $4,000 in profits in 2022, make sure that you keep closer to a third of that in the bank account so that you can pay both 2022 taxes and 2023 estimated taxes.
After reading this article, you might be ready to throw the towel in on your Magic flipping business. The idea of having to spend several days working on your tax return and freak out over a potential audit just to make enough money to buy a few extra boxes of Collector Boosters is legitimately exhausting. I don't blame anyone who just decides to wash their hands of the whole thing and move on.
Here's what I'll say, though: if you actually do keep proper track of everything I discussed today, this stuff isn't really that hard. Just have a spreadsheet going where you add in your business expenses as you go, and another where you keep track of how much you pay for each card as well as how much you sell it for. 95% of the work will be done for you before tax season even starts. If you save this stuff for the last minute, tax prep will be way more difficult and anxiety-inducing. If you just take a few seconds to log everything as it happens, this stuff is actually super manageable — I promise.
The one good thing about this tax code change? It forces all of us to actually track how well our business is doing. You're going to see exactly which spec opportunities paid off, which failed to pay off, and by how much. You're also going to get an accurate dollar figure at the end of the year that will truly represent how much profit you pocketed at the end of the year. My suggestion? Try it for a year, and see what that number looks like. If you made enough in profit to justify the work, great! If not, then you'll have a very good reason to quit or revamp your business in the future.