Three true tax outcomes of baseball memorabilia
Home runs are up, and whatever that means for baseball, it also means more opportunities for fans to catch a ball and trigger different tax outcomes. But the good news is that just like the pitcher and hitter control baseball’s true outcomes, taxpayers can control their taxes’ true outcomes based on what they decide to do.
Giving the ball back
Fans might give the ball back – or even throw home run balls from visiting teams back onto the field, maybe even hitting the offending player on his way around the bases – if it has significance to the player or the history of the game. If the lucky fan gets something of value in return from the team, like tickets to next season’s games or other memorabilia, they could face income taxes on the fair market value of those goods.
But if the ball has a lot of value, over the gift tax exclusion of $15,000, could it trigger the gift tax, which the giver – in this case, the fan who caught the ball – would have to pay? No, because in this case the IRS says it is more like returning unsolicited merchandise than giving a gift.
“The fan won’t be penalized for giving the home run ball back to the team,” said Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block.
Selling the ball
Even a true fan might decide to sell the ball, especially if it makes them a lot of money. They will have to pay taxes on that as a long-term or short-term capital gain, depending on how long they wait to sell it. In addition to having lower tax rates in general than income tax rates, capital gains can also be offset by expenses, or basis in the property. However, since the fan did not pay anything for the ball, their basis is probably zero.
“You would probably have a zero basis. However, if you sell the ball at auction, you can reduce your gain by the amount of commission paid to the auction house,” said Perlman.
Holding onto the ball
Anyone who holds onto something like a home run ball from an MLB playoff game won’t owe taxes as long as they hold onto the ball. But they won’t live forever, and the estate tax could come into play when they die and transfer the ball to someone else.
“You may have escaped the income and capital gains taxes by holding onto the ball, and it’s probably likely that you’ll escape the estate tax when you die, too, because it doesn’t kick in until your estate is worth more than $5 million,” said Perlman.
Controlling taxes’ true outcomes is not just about getting lucky at a playoff game and coming home with something valuable. Controlling taxes’ true outcomes is how a baseball fan might think about tax planning.
“It might not seem like it, because your income is your income and the tax code is the tax code, but there are outcomes under your control in tax, like your taxable income,” said Perlman. “The trick is knowing what changes to make to get the outcome you want. It could mean being strategic with the timing of your charitable giving and property tax payments, or increasing your retirement savings to get a tax benefit.”
H&R Block is ready to help clients with unemployment income in 2020 claim the new tax break in the American Rescue Plan Act. Read more.