The Taxman Comes? Or Taxman Does Not?

When it comes to trades, both people have realization events. You would have to show to the IRS that you sold your coins for what the Fair Market Value is (which will be calculated by them and you, although you can put in the contract for the trade what you consider the FMV to be and they will use that unless it is super off) and you need to recognize the gain of FMV-Basis. You then also have the new purchase which has a new basis of what you paid for, so what you established as the FMV for the trade. The other person in the trade has to do the same thing for their coins.

So the taxman will cometh but this is one of those situations where you would probably ask, would he really know if you didn't report it? Probably not and even if you were audited you could just say that the trades were the originals that you had pulled from searching the bags. Of course, this is lying and no one would ever lie to the government :P

This might be how everyone else in the world sees a trade, but this is NOT how the IRS sees it. The IRS sees it as two different transactions. They break it down and say you are selling your coins (your side of the trade) to the other guy for cash. That cash needs to be taxed since it is income. You are then taking your cash and buying from the other guy his coins (his part of the trade) and so he has income for that cash that needs to be tax. This is how the IRS sees it even though no cash traded hands. So you can take any losses or gains with relation to what your basis is in the items you are trading, but it is not on the total trade.

There is nothing that explicitly says that, that is just how my professor explained it to us in class. It is derived from section 1001 of the IRC 1986: Determination of amount of and recognition of gain or loss. (a) Computation of Gain or Loss.-The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized. (b) Amount Realized.-The amount realized from the sale or other dispositions of property (meaning exchanges in our case) shall be the sum of any money received plus the fair market value of the property (other than money) received.

The reason that they are treated like two events is because both sides need to determine and recognize the gain or loss. I say that it is effectively like you made a sale for cash and then a purchase for cash because that is what the IRS is going to effectively reduce it to, the dollars the property is worth.

I am only speaking generally here. It should be noted, and maybe this is what you are thinking of Collector-Corner, is that like-kind exchanges are a non-taxable, that is they are realized but not recognized, under section 1031. However, note that this section has some very specific requirements, notable for our discussion, that the property must be held for an investment. Now we all might like to say our collections are investments, but that would be a determination of fact to be made. In addition, like-kind exchanges of personal property are narrowly construed as to what is like kind. An example of this is silver bullion being held for investment is exchanged for gold bullion to be held for investment. The IRS has said this is NOT a like kind exchange because they are different metals with different uses. So while it might seem like exchanging silver of one denomination for silver of the same denomination just with a different design might be close enough to be like-kind, they might argue that this is evidence that they are not being held for investment purposes since the aesthetics of the coin did not impact the bullion value. However that is just a guess.

Please note for those reading this thread, I do not have a tax LLM and am not a tax accountant. This is just what I have learned in my federal income tax course at law school. So please consult with an attorney or account before making any decisions that might have tax implications for you.

That definitely makes a difference. All the stuff that I have said above is with regards to this being a personal exchange and not part of your trade or business. My class focused on personal tax issues rather than business tax so I can't tell you all the details of how it would be taxed, but what I can say is that section 1031, the like-kind exchanges specifically exclude inventory for a trade of business, so if you are a dealer you are unable to not recognize it under that section.

With regards to the other hypothetical, in that case I would say that you would divide your purchase price into the individual units to determine their basis, so each dollar coin has a basis of $2. You then trade the rare one for the $1000 dollar coin so you can look to the section 1001 I quoted above and see that you just need to subtract the basis from the FMV of the property received to get your gain: $1000-$2=$998 gain. You still have all your other 999 coins with their basis at $2 as well so if you sold them again for $1 you could claim a loss of $999 or if you sold them for the same $2, no gain or loss so no tax consequences there.

The only place you went wrong was in thinking the whole basis is for everything in the transaction, but they will try to assign it to the individual parts or partitions if they can (notably when everything is the same. But, for example, if you bought an old piano for $50 bucks and then found a gold coin in it later, the gold coin would not have the basis of the piano or even a portion of it. Its basis would be either face value or the metal content. Obviously you would want it to be metal value in this case so you would have less gain when you sold it, but I am not sure off the top of my head what they would do in that situation.)

I would think in the OP situation the IRS would view it as a like kind exchange (common silver halves of one type worth mainly silver value, for common half dollars of another type worth basically silver value) No taxable event having taken place. Now when you sell them their taxable basis would still be the face value they cost you from roll searching.

A bit off-topic, but does anyone here have a dealer that will write them a bill of sale that includes the grade and book value for EACH item bought? - and we buy lots as collectors. What a tiresome job that would be. Supposing they did, couldn´t you just say that mishandled all of your coins, thus degrading them, and sell them at a ¨loss¨? Keeping records like that is just loco. Or if you bought a coin that was undergraded or overgraded in relation to its book value... Which list does the IRS look at - Red Book, Blue book, Greysheet, Krause, Friedberg... They´re all different in terms of pricing, plus grading is subjective. The IRS would have to prove everything because there´s just no way they would understand the hobby.

I would have a different argument. At most, the taxable value of the trade would be $25.

The coins are still valid US currency worth face value. If I went into a bank with 20 Morgans and 10 Walkers and deposit them into my account, I would only receive $25. If I happen to look at the teller's tray and spotted 20 Peace and 10 Benjamins and asked for my $25 from them and she complied, I still only received $25 worth of currency. Same thing with a person to person trade.

However, if I am walking down the street with my $25 in coins and discover that one of them is a 1964 Peace dollar. Then, after I post my discovery here, someone gives me a gazillion dollars for it, it is then that I would be taxed on a gazillion dollars.