Question

During 2018, Fred Reardon incurred the following expenditures in connection with his coin collecting activities:

Travel expenses	$10,000
Purchase of coins still held at end of year	11,000
Cost of coins sold during year	9,000
Total	$30,000

Fred received $16,000 for the coins sold during the year.

(a.) If Fred's coin collecting activities are considered to be a hobby for tax purposes, what related expenditures are deductible on his 2018 tax return? Show computations and explain in detail.

(b.) If Fred's coin collecting activities are considered to be a trade or business for tax purposes, what related expenditures are deductible? Show computations and explain in detail.

Answer 1

a) If coin collecting activities are considered as hobby then capital gains tax will be levied.

Capital gains/ losses computation:

Sales of coins.     = $16000

Less purchase of coins. = $11000

Less cost of coins sold. =$9000

Capital loss . =$4000

Note: Purchase cost of coin is direct costs. It is assumed that cost of coin sold is directly relatable to sales like brokerage.

b) If coin collecting activities are considered as business then tax as per business profits and losses will be levied.

Computation of profits and losses from busienss:

Sales of coins. = $19000

Less Purchase of coins. = $11000

Less Cost of coins sold. = $9000

Less Travel expenses. =$10000

Business losses . = $11000

Note: Here travel expenses to be considered for deduction as it's incurred only for purchase of coins.