I need to start off with a disclaimer. I am not a tax professional. This article is based upon many hours of research I have done into the tax code. But, taxes and tax law are not my main area of expertise. You should consult with a tax professional before using any of the information presented in this article.
Your video game collection could save you money on your taxes. If the IRS considers you a video game investor instead of just a collector, you can deduct expenses related to your collection and lower your tax bill this April 15. So what does the IRS think you are? A video game collector or investor?
The difference between a video game investor and collector in the eyes of the IRS depends on what your primary purpose is for owning the video games. If you buy the games for personal pleasure only and to play them, you are a collector. If you buy games with the intention of making money, you are an investor. This may sound straight forward, but the IRS looks at many factors to determine your status:
- Do you keep good records? Investors keep track of what they buy and sell.
- Do you consult outside advisors? Investors buy magazines and books from experts and ask others for advice.
- How much time or effort do you expend? Investors generally spend more time than collectors researching, maintaining, and tracking their video games.
- Can the assets appreciate? You can't be an investor if you have no chance of making money.
- Have you made money from this activity before? Investors will probably have made money at some point previously in the same manor.
- How much fun do you get from your purchases? Investors buy more for monetary value than personal pleasure.
None of these factors determines your status by itself. The IRS looks at all of them and decides what you are. If you look like an investor, smell like an investor, and sound like an investor, you must be an investor.
The biggest difference between a video game investor and a video game collector tax-wise is the investor can deduct expenses related to their video game purchases (IRS Section 212), while video game collectors cannot (IRS Section 262). An investor can write off video game magazine subscriptions, storage costs, insurance, cleaning costs, and other expenses related to their investment.
Below is a list of do's and don'ts for video game collectors and investors.
Do's for Video Game InvestorsDo Keep Accurate Records of Your Collection
This is the single biggest factor in determining if you are a collector or investor. Investors keep good records of what they bought, when they bought it, and how much they paid for it. Collectors don't. Creating a simple Excel spreadsheet with all this information and keeping it up-to-date is not that difficult but is a must.
Do Know the Value of Your Video Games
You will need to know how much your video games are worth if you want to be considered an investor. Buying a video game value book or looking up your video game prices online will work. It can be nice to brag and say, "My video game collection is worth $5,000" and know its true.
Do Read Video Game Collecting Publications
Reading video game publications, subscribing to video game collecting magazines, or buying video game collecting books help show the IRS that you are a video game investor. You are spending time and money trying to figure out what to buy and know the industry better. Plus you can write off any of these expenses on your tax return. They are investment expenses.
Do Store Your Collection Seperate From Your Personal Games
You can deduct a portion of your rent and heat as investment expenses. Let's say your house is 2,000 sq. ft. and your storage space for the games is 1,000 sq. ft. (I wish I had a collection that big). You can write off 50 percent of your rent and heat because they are expenses needed to house your investment. If you keep all your video games intermixed, collectibles with personal games, you will not be able to deduct storage expenses.
Don'ts for Video Game InvestorsDon't Buy New Games and Open Them
I'm not saying you can't buy any new games. You can still buy new video games for your personal use, but do not consider those games as part of your investments. Video games lose value once you open them, much like cars drop in price once you drive them off the lot. That is a purchase for personal use, not an investment and the IRS knows you wouldn't purposefully make an investment lose value. That would be like buying the Mona Lisa and drawing a mustache on her face.
Don't Book Trips to Gaming Conventions Then Call Them Investment Expenses
Be careful about booking trips to E3 and the Tokyo Game Convention and then writing them off as investment expenses. For most video game collectors they probably don't report enough income for the investments to make this acceptable. The IRS has ruled in the past that if your business expenses are a lot more than your income, you are probably not an investor.
Don't Play the Games Then Sell Them
Again, this is fine to do but you are not an investor. If your records show that you consistently buy video games and sell them two weeks later for no profit, the IRS will probably assume you are playing them and then selling them. In that case you are buying for pleasure. You cannot deduct expenses related to personal pursuits.
Don't Do Anything You Are Uncomfortable With
If your gut feeling is you shouldn't be considered a video game investor then don't deduct any expenses.
There was some discussion in the comments section about taxes on the income you make from selling your video games so I wanted to clarify a few points and post one more major benefit to being classified as a video game investor.
This is an exact quote from the IRS Capital Gains Fact Sheet, "all capital gains are taxable and must be reported on your tax return". There is no difference here between a video game collector or investor. No matter what you own, if it increases in value from when you buy it to when you sell it, you are supposed to report that income on your taxes. Here is the good part for investors though:
"only capital losses on investment or business property are deductible"
IRS Capital Gains Fact Sheet
If you are classified as a video game investor, you can deduct the losses from your purchases. Here's an example: An investor and a collector both buy Lunar Silver Star for $50 and Earthbound for $100. A year later they both sell. Lunar sells for $70 and Earthbound sells for $80. Both the investor and the collector report $20 in capital gains on their taxes for Lunar. But only the investor can report the $20 loss Earthbound.
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