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Hey loyal Insider readers! It’s been a while. Now that things have quieted down on the back-end of QS, I can return to my roots and begin writing again! I’m sure you all have loads of questions, so here are a few answers before I jump into my topic for the day. If you don’t wnat to read all the back-story about the last month, just search for “---” (no quotes) and you’ll jump right to it.
Where the hell have you been!?
Well, I’ve been abroad for a month, ostensibly “finding myself” and meeting up with Magic players around the world. More on this later. Before that, since around Thanksgiving, I was preparing all the back-end stuff for Insider with Chris, working out budgets with Doug, and generally making sure the site kept running through the launch. It was more work than I anticipated, as always, but I think you’ll agree that the efforts were worth it!
What happened with that Untapped Tour?
A lot happened. As I said, I meant to travel the world and do amazing things. A few issues cropped up along the way, some I am at liberty to discuss and others, not so much. At least a full week was lost to a stomach virus, which was an absolute joy. About 5 days into the trip, shortly after the BA Faces of Opportunity contest, my netbook died. This was my only real way to write, edit and post things on the site. Fixing it was not really an option along the way. Worst case scenario, right?
I had planned to spend my 10 days in New Zealand working on uploading a ton of media and doing some serious crunch-time work. Unfortunately, around lunchtime on my third day there, the entire city of Christchurch was levelled by a 6.3 magnitude earthquake. I was in the city center when it all went down, and I must say I’ve never been so terrified in my whole damn life. Thankfully I was outside when the quake hit, but many hundreds were not so lucky. I was able to help others in need, including helping a distressed woman locate her daughter at pre-school (she was alright!) Needless to say, my mind was a million miles away from Magic that week.
All of these factors combined to really screw up my plans for the tour, and I made the executive decision to simply kill it. I did learn quite a lot from my trip, and got some wonderful business advice for QS, from some really outstanding people. Look forward to a lot of great things in the future.
What does the future hold, then?
I can’t get too specific, but I can tell you where our thoughts are. First and foremost, as our Insider subscribers continue to grow, we’re looking at ways to keep adding value to our existing customers. We’re constantly adding writers, and your support is what allows us to pay them a fare wage, so thank you very much for that!
We’re also viewing QS as sort of an incubator for new technology in the TCG world. There are some projects that I wish I could discuss, but we’re looking at things that can automate the drudgery of owning Magic cards. We’re also looking at more efficient ways to gather, process and analyze data in our community, similar to how financial institutions use the internet to gather broad-spectrum market sentiments.
We’re always looking for new bits and pieces to add on, and that includes affiliations with other sites. We’ve had a few sites inquire about us perhaps rolling their technology into our site, and we’re in the early stages of working out those deals. If you know of anyone who runs a Magic site and might want to team up, send them to me (firstname.lastname@example.org) and I’ll get it started. The more outlandish and tech-forward, the better! We want to be at the forefront of developing tools for traders and players.
Today’s topic was suggested by reader Mark Slack of Columbus, OH. Mark wanted to know some stuff about taxes, and I promptly told him to ask Doug. He also wanted to know how I keep track of profits, losses and inventory. While there is no one right or wrong way to do this, I’ll explain what I do, and how your circumstances may vary.
This is a personal choice, but your goals and level of stock will help determine how to go about doing this. I have a LOT of cards. I get tons of collections from stores, trade at events, and a lot of people come to my store to trade in cards as well. Thus, i have more cards than i can process. This does not lend itself to a tight inventory system at all. For a long time, I tried to keep every card sorted, organized and indexed*, but when you have 50,000 cards that turn over quite rapidly, it becomes more trouble than it’s worth - literally. The labor required to keep the cards sorted and indexed is just cost-prohibitive since it scales with the size of your collection.
I used to use a digital system to inventory it all, but keeping that up to date was sucking out all my time. TIme that is better spent selling cards, buying cards, and trading cards. Time that is frankly better spent doing anything but indexing. If you’re a site like StarCityGames.com, which has a well-established platform and millions of cards in stock, then your indexing needs are much greater. I experimented with a web store, but found that at my level of stock, it’s just not too practical - yet! It’s all about knowing where to spend your time, and I view time and money in the same light. To me, money buys time. I can pay someone $X.00 to sort and index my cards, and that saves me time. I can remove the need to index entirely and save both time and money.
Sorting is, in my opinion, a non-negotiable necessity. When I opeend my retail store, I heeded the common complaint of, “They can never find any cards in that place”. My policy was, “I can find you any in-stock card in 10 seconds or less”. It worked, and people took notice. No matter your size, keeping your cards perfectly sorted will return many dividends. Selling stuff to dealers becomes a quick and easy exercise, handing someone a well-sorted trade binder demonstrates that you’re serious about the game, and building decks becomes almost academic. Sorting is worth the time it takes, but indexing the cards rarely is. If you have low turnover and not too many cards, feel free to try, but in my experience, indexing is best left for the pros.
If you don’t index your cards, then you’ll have trouble keeping track of your profits and losses (PnL). This is actually quite alright. Since you don’t have accurate records of what you acquired, when, and for how much, it becomes difficult to do any accounting whatsoever. You have to, on some level, trust your hustle. I know that when I buy cards from someone at $X in my store, I can usually sell them for around $2X. This is the same with most dealers. Our buy prices are set such that it is almost impossible for us to lose money. In rare events, buy list errors can cause loss, as can sharp changes in the market, but these are exceptions and not rules.
As someone who considers himself a data freak, it pains me to say this. Your specific PnL doesn’t matter. There’s a much better way to measure this. Cashflow. As far as I am aware, and I am open to correction, the IRS (and most likely, your government’s tax collectors) doesn’t really recognize Magic cards as a financial instrument. This is because there is no one specific value for a given card. You could aggregate buy lists to get an average sale price, compare it against eBay and the retail value of the card, but really, the IRS cares about money. If you sell that Beta Lotus on eBay for $50, two things are true: 1) You’re a moron. 2) The IRS doesn’t care that you bought it for $1000, nor does it care about anything other than the fact that $50 just hit your bank account. Depending on how you’re set up, you might be able to claim the cost of the lotus as an expense, but I know precisely nothing about taxes. Consult an accountant, not a journalist.
If you have a good idea of what cards are worth, your trades should always be profitable. It becomes irrelevant how profitable they are, because they’re not realized gains. To get an accurate picture of what you’re doing will take hours of indexing and charting. Hours that are better spent making some damn money instead. There are serious diminishing returns in this category. Using your instincts, a good mental snapshot of the market, and trusting your system, you can keep track of PnL by using online banking.
I like using PayPal, since I can get paid for almost anything that way. I have their debit card, which has pulled me out of some tough financial circumstances. It links to your bank account too. You can also use the debit card to withdraw cash, so your entire transaction history is reflected in your current balance. From there, just sum up cash on hand, accounts payable and receivable*, and your Paypal balance and keep daily track of it if you are really concerned. I find this level of accounting to be unnecessary, and just handle it at the end of the tax season. I trust my system to turn a profit, and focus more on cashflow than anything else.
The rate at which you invest and receive a return is more interesting to me than the specific percentages. As long as I’m not losing money or breaking even, I’m happy. Clearly, my system emphasizes the proper principles of trading, but that’s the scope of another article entirely - one I’ve written at least once. If your system works, you don’t need to control inventory tightly until you’re a real bona fide business entity with a ton of assets.
The drawback to this slightly inaccurate system is that it’s tough to get an idea of what your stock is worth. When I used a digital inventory system, I had a snapshot of my current inventory’s value and cost in realtime (based on my buy and sell prices). This proved useful in figuring out where to generate cash, but it’s pretty easy to eyeball your collection and guess where you have the most value. It doesn’t take a genius to go pop open your mythic rares and count the number of Jaces and Tezzerets.
By and large, the level of accuracy required scales with the size of your collection. Until you are at a very high level, I’d suggest not wasting the time. The only real reason to do digital indexing is for retail/online sales purposes. Otherwise, you’re simply not generating revenue from your actions, and thus, wasting both time and money. Inaccuracy is not a good thing, but when doing a cost/benefit analysis, a bit of inaccuracy can have a negligible effect on your bottom line when it’s understood and planned-for. 80% accuracy that takes no time is way better than 90% accuracy that takes a lot of time, and the returns keep diminishing from there. The best thing you can do is develop a trading system that’s profitable and stick to it. When you need cash (which is always, unless you have a ton of cash already), just use your instincts and sell off some overstock or at-risk cards that you suspect might go down. Whatever you do, don’t spend too much time on bookkeeping as a trader. Just get out there and trade.
*Indexing - The act of cataloguing cards on paper or in digital form in order to more accurately track performance of trades and stock levels.
*Accounts Payable and Accounts Receivable - the fancy way of saying “People whom you owe money” and “People who owe you money”. And how much, of course.
10 thoughts on “Tracking Profits and Inventory”
Great article on the basis of cash flows, one of the primary accounting principals is to make it look like you make as little as possible and honestly this system lends to that due to the fact that like you said cardboard to cardboard trades are not profit although if you keep record of all of them and values attached they can be recorded and audited as such. (sorry im an accountant). I also feel this may be a good topic to discuss in one of my coming articles on how exactly to handle it for tax purposes (Magic can actually save you money!)
Ouch. You just missed a $950 tax deduction on your Black Lotus.
As asthetically un-pleasing as it would be, I wish each individual card had a small barcode or QR code. How do places like Star City Games do this? As a CPA I've always been pretty curious about that.
In response to Ryan's comment, technically the IRS could make you claim income on a cardboard to cardboard trade if you're grinding out value from card to card (lol…unless you do a 1031 exchange for each trade…that's hysterical…that's CPA humor.)
For instance, Medina's pack to power could be a taxable event at each point from the pack of Rise of the Eldrazi all the way to the Mox.
This is an extreme viewpoint and the IRS would probably never audit someone for something like that, but the law is in the code to allow them to if they chose.
I will defer to the accountants and their knowledge of what can or cannot be deducted. I do hope one of them will consider writing an article about it!
I will do something in the future if no one else claims this but well frankly I dont think enough people are that far in that they care enough, theres very few of us that could actually claim this for any reasonable sake. But yes Luke is correct, though tech Luke where do you derive value since the cardboard is technically only worth what the value of the trade is, you cant set example of a store due to price fluxs correct? Maybe I am missing something here but even if you wanted to record it unless you were just straight FIFO Periodic that seems insane. I mean it could be done but holy crap the work involved would be a 40 hour a week job by itself.
Obviously all of the following is just the somewhat masturbatory rambling of a guy stuck in the middle of tax season and losing his mind. While all true, this is written mostly in jest.
If you are 100% going by the book then the IRS would like to see everyone report all transactions that result in income. That is the rule in black letter code.
The IRS specifically states that bartering constitutes a taxable exchange of goods in the same vein as selling for cash. If two objects of equal FMV are exchanged then no gain/loss is realized or recognized for either party. But in the case of a grinder (or even worse: a shark) gaining value on a trade, the person who got value had a taxable gain.
Let's look at a trade I made on MOTL tonight, using Apathy House pricing:
x2 Sphinx of the Steel Wind $11.52
Baneslayer Angel $10.33
(Side note: Kelly, can you believe in all the time since I visited you in your store last year, I still haven't gotten my hands on a playset of Baneslayers….which is what I was trying to get from you at the time. Its like some insane quest to trade for them rather than buy with cash…I just refuse to give in)
My trade partner has a realized gain of $1.19. Again, following the code to the letter, the IRS would like to see this reported somewhere on his tax return.
Like I mentioned earlier though, if you are exchanging two like products (which we are doing here), you can defer any gain or loss until you sell the goods received. This is a 1031 exchange, most often seen when people swap real estate, but technically you are doing a 1031 exchange when you trade in your car to a dealer.
My trade partner can defer the gain and not pay tax on it until he sells the two Sphinx of the Steel Wind. His basis in the sphinxes will be whatever his cost basis in the BSA was, less the gain of $1.19. By reducing his basis in the sphinxes, he will have greater gain when he sells them, thus finally recognizing his realized gain from our exchange.
Clearly this is a complete nightmare to keep track of in any realistic way, like Kelly suggests in the article. My guess would be that a store never actually shows inventory for card singles on its books, preferring to expense all cards as they are acquired as Cost of Goods Sold, and recognizing income as the full sales price when cards are sold. That way for any given card your true gain/loss is being reported as gross sales less COGS, and the IRS is happy. Keeping sealed product and the like in inventory would be easy enough, and correct. If I were a store's CPA I'd feel pretty uncomfortable if I didn't see inventory of some kind on the balance sheet, but would never recommend that singles be kept that way.
While an accounting/tax article about this topic would absolutely be at home on QuietSpeculation.com, I can't imagine anyone who trades here would actually report their gains to the IRS. I'd be glad to write one, but I'd be hard pressed to think that anyone would take it to heart.
The spot where someone would want to in order to avoid scrutiny by the IRS would be when grinding value on trades over time and then cashing out by selling to a dealer. If for some reason you were audited the IRS might wonder where that cash came from. It would be nice to be able to prove that your gain wasn't equal to the full amount of the cash received, because you obviously had some costs involved in earning that case. But with no clear record keeping…good luck proving it.
Even then, you would have to be dealing in major volume for the IRS to even care. I have no idea about specifics, but in listening to both Kelly Reid and Jonathan Medina talk about their trading…maybe this is could be a concern for them…but most of us are just little tiny fish in a big pond that the IRS has no time to audit.
Interesting comments and great article, Kelly, thanks for writing it.
I was the one who inspired the topic at hand. The whole issue popped up for me because I sold tons of singles the first couple months this year on eBay. Enough that they'll likely send me tax info at the end of the year which I'm not exactly sure how to deal with. I have enough of a paper trail on my larger card purchases that I should be able to approach it from a cash flow basis, but I'm also going to have to look at deductions to offset some of it which is going to be a bother. As much as I like the idea of trying to deduct something like draft entry fees or con badges, the hassle is enough to make me reconsider using eBay as a sales outlet.
I like what everyone is saying, it makes a lot more sense to not even track singles. I'm a sorter-librarian at heart I guess, and my instinct had been to try to track the life of every card. However, the more I play, the more I trade, the more I feel the drudge of the constant tracking & updating of spreadsheets. I'm definitely feeling the time loss at this point and it's overpowering my need for absolute control. Thanks for pointing me towards a better way to think about the whole process.
Ahh Luke thank you for all that cause well frankly as we have both denoted no one really needs to do this, I make enough at this game to report theoretically but the thing is when you cash in to dealers they typically aren't writing you an expense form and therefore tracking would be a pain, I have had people ask to write them receipts when I buy collections and frankly I just laugh theres just no point.
1031 would work and if you were to record that would be advised but would you do like I said and keep inventory on periodic FIFO? seems best for recording purposes perpetual would just be a bitch and LIFO would show some wild swings and you would be sitting on old rares that when acquired were 15 and are now .10. I would love to see this from you Luke though frankly id probably be one of about three people who would actually know what the hell you were talking about 🙂
Im probably in the bigger fish pond and I cant even see being audited, and if I am I will just show them all the receipts for when I "pay" to draft and aquire sealed product. I have also done some research and found that truly you can value the price of any card at the cost of a pack at retail divided by the number of cards in the pack, I know theres way more to it than that but really like I stated earlier FMV on Magic cards is extremely hard to track and so if this system could be utilized it would easily streamline things. Again Luke is def more qualified than I am so although I wouldnt see the need for an article I would be interested if you ever get the need and get bored.
Kelly! Really great to see you writing again, but also awesome to see a store owners perspective on this. My article that went up friday, talked about tracking results and goals, and I want to throw my two cents in. I think tracking gains and losses is a really valuable asset, it allows you to create goals for yourself, and have a metric to achieve them. While you could really use any metric, its the most logical one. From my perspective, most of us traders (ie, non-store owners) are trying to fund our hobby, and make some bucks on top of that. Monitoring cashflow, is of course important, but when your cashflow applies to so many things other than simply the cards we buy/sell, it's really helped me to keep track of my collection, when I got in and out of speculations, so that I can be realistic about my results.