Last Call? How new tax rules will affect Magic: The Gathering's secondary market

by Journey’s End Games

Last Call?

Whether you’ve been on the fence about selling your MTG collection, considering buying that one expensive card to complete your deck, or anywhere in between, December 31st is an important date for you. Why? Because December 31st 2021 is the last day before updated IRS regulations regarding 3rd party transaction reporting go into effect.

For those unfamiliar, I’m referring to a small provision in the American Rescue Plan (SEC. 9674) which modifies the de minimis (or “legally too trivial to merit consideration”) reporting requirements for 3rd party pay sites on the sale of goods and services down from $20,000 to $600. This means that starting on January 1st 2022, sites like Ebay and TCGplayer will send IRS Form 1099-K to anyone selling on their sites who transact $600 or more in a year. This will affect a lot of sellers who previously stayed below the $20k threshold. 3rd party transaction services like PayPal, Venmo, and Zelle will also be required to inform the IRS of accumulated sales of goods and services.

Why did it change?

Well the short version is, some people in the “gig economy” were avoiding taxes by working multiple part time jobs for companies like Uber and Lyft (I don’t mean to pick on these companies or the people working for them, they are just the easiest example). A gig worker receiving less than $20,000 from any one payer could earn from multiple payers without their income being reported. In fairness, many didn’t even know they had to pay a tax if they didn’t receive a 1099-K. There are others who sell online with “clear profit motive” who distribute their sales on multiple sites to avoid meeting the reporting threshold. Now the government wants its cut.

Let’s be clear here. By law, this was technically always taxable income. Annual sales below $20,000, even as a hobby by regular people, were always reportable and subject to tax law. A handful of states already had the lower threshold in place. The IRS has guidelines on how it distinguishes between hobby and business based on profit motive and profit expectation. The IRS has always wanted to know whether people have been making money by selling their cards. It’s just not how it worked in practice below $20k. With the already passed regulatory guidance and current attempts underway to give the IRS more access to everyone’s banking information, specifically regarding financial transactions over $600 (now $10,000?), Uncle Sam is clamping down hard and it seems like a lot of people are going to be caught unaware come the new year.

Let me be clear again. In no way am I suggesting you attempt to avoid taxes. I am making no recommendations of any kind. My goal here is simply to point out what I believe will happen in the MTG community, particularly the secondary market, when these changes come into effect. There are a lot of small time, or hobbyist, sellers who have viewed the $20,000 threshold as the de facto limit to keep sale income untaxable. Even guys actively buying and selling for decades like Dan and Edwin from Unhinged Magi believed this (thanks to them for alerting me to this topic). I believed it too, until I did the research for this article. Basically, unless you’re a tax attorney, an IRS auditor, or someone like me willing to crawl through irs.gov to research an article, basically everyone sane treated the $20,000 threshold like a limit for untaxable sales. Thus, that’s how it worked in practice. So even though it’s not technically a tax increase for the little guy, it will absolutely feel like one.

Why does it matter?

More sales will be affected by income or capital gains taxes. More small-time sellers will have to keep track of their bottom line. Traditionally, garage sales or other hand-me-down sales are exempt because there’s an expectation that the items were originally purchased for a higher price than the sale price. And this is still true, but it’s not clear how the IRS will handle this when there are no receipts. So if you’re like me, and no way do you have receipts for the overwhelming majority of your collection, especially those older more valuable cards, be prepared to pay capital gains taxes on the entire dollar figure if you plan to sell part or all of your collection. Anyone who treats buying and selling cards as their hobby will have to keep all their receipts and keep close track of money in vs. money out. Nothing like being forced to keep track of tax information to steal the fun out of buying and selling cards online as a hobby!

What’s the impact?

Prices will increase throughout the secondary market. Increase in effective tax will force raised prices, whether directly from the seller or by increasing the cost for dealers to purchase collections for resale; and indirectly via reduced supply when hobbyists pull listings to stay under $600 and smaller sellers or individuals who were trying to work out how to make selling cards a business start falling away. With inflation rising, international supply chain problems, and Hasbro’s announced across the board price hike for toys and games in time for the holiday season, this effective tax change is just the sort of shock to bust price memory and send prices soaring.

Sites like Facebook Marketplace or Craigslist will likely see a lot more advertisements requiring in-person cash transactions, which will slow down sales and may increase risk of scams. Buylists for in-store credit will become increasingly popular as tax deductions will automatically be tracked and people turn to reputable dealers to avoid the incoming uptick in scam attempts.

Inventory will dry up a little as personal collections become harder to buy and sell. People like me with small collections will have to temper their excitement at watching the dollar figure for their collection increase while knowing that the actual value of it has decreased.

Collectors and investors will have just that much more incentive to hoard.

Who will this affect?

Well, everyone buying and selling cards, directly or indirectly, but let’s break it down a little. For those already doing upwards of $20,000 per year anyway, this requirement doesn’t change much. Small to large businesses and individuals with significant sales volume will continue operating as normal. Low to mid volume individual sellers will find their hobby more difficult to pursue and a lot of them will be pushed out of the market. Actually, established businesses may see a relative benefit when masses of hobby vendors depart the market. 

It will be that much harder for people to learn the ins and outs of making a business out of buying and selling MTG cards, meaning fewer new businesses will join the market.

Assuming no other changes, increased taxes and decreased inventory means fewer items at higher cost. So everyone who wants to buy in the secondary market will find it more expensive, while those selling personal collections will net less money for their sales.

The Good News

We probably have a little bit of time before the effects really kick in. This regulatory change is not the sort of thing which will make top headlines, so there’s likely a lag between implementation and personal knowledge which affects behavior. The largest MTG sellers which set the market baseline have significant current inventory purchased prior to the law taking effect, so their pricing will likely reflect that in the short term. Though for sure they are aware of what's coming and may start increasing prices pre-emptively. Self-employed businesses are required to report earnings quarterly, so we may see widespread adaptation to the new law affect the market by March 2022, or it may catch people off-guard when they receive their 1099-K at the end of the year and have to file their 2022 taxes by April 2023.

The Bad News

Once prices start reflecting the changes as a result of the tax regulation, they won’t come back down. Ever.

Any seller unaware of what has happened will have a rude awakening come Tax Day in 2023.

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Steven Whitham is a guest author, not employed by Journey's End Games. Steven has had an on-again-off-again relationship with Magic: The Gathering since he started playing in 1995.

The views and opinions expressed in this article are solely those of the author and do not necessarily reflect those of Journey's End Games, its leadership, or employees.

 

 

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