Imagine holding a piece of Major League Baseball history—the ball that marked Shohei Ohtani’s record-breaking 50th home run and 50th stolen base in a single season. Now, imagine that very ball heading to auction, where bids could reach millions. But while collectors dream of this ultimate sports memorabilia, one thing stands in the seller’s way: taxes. Here’s everything you need to know about the tax impact of selling high-value memorabilia like Ohtani’s baseball and how timing your sale can mean a world of difference.
Short-Term Capital Gains: A Costly Mistake
For the lucky owner looking to cash in, selling too soon could mean giving up a large portion of the profits to Uncle Sam. In the U.S., capital gains taxes differ based on how long you hold an item before selling. Selling memorabilia within one year and a day classifies the gain as a short-term capital gain, taxed at your ordinary income rate. This could reach as high as 37% for top earners.
Consider a hypothetical sale where Ohtani’s baseball fetches $500,000 at auction. If the seller is in the top tax bracket and sells it within a year, the IRS will view this as ordinary income, resulting in up to $185,000 in taxes. The take-home? A considerably reduced profit of $315,000—and that’s before accounting for any state taxes.
Example Breakdown:
- Auction Price: $500,000
- Taxed at Ordinary Income Rate (37%): $185,000
- Profit After Federal Taxes: $315,000
So, even though the baseball’s historic status may attract high bids, selling it too soon can lead to a hefty tax bill.
The Long-Term Capital Gains Advantage
Holding onto the item for at least one year and two days before selling qualifies the profit as a long-term capital gain, which is taxed at a more favorable rate of 15-20%, depending on income. This waiting period can result in substantial tax savings, leaving more of the sale proceeds in the seller’s pocket.
Using the same $500,000 auction price, the tax owed at the long-term capital gains rate drops to a maximum of $100,000. That leaves a much healthier net profit of $400,000 to $425,000.
Long-Term Sale Example:
- Auction Price: $500,000
- Long-Term Capital Gains Tax (20%): $100,000
- Profit After Federal Taxes: $400,000 – $425,000
While the extra wait can feel like a long haul, it’s well worth it when you’re pocketing an additional $85,000 to $110,000 after taxes.
Why the Difference? Short-Term vs. Long-Term Capital Gains
The IRS separates capital gains into short-term and long-term categories to discourage quick flips on high-value items. Assets like stocks, real estate, and even sports memorabilia fall into these categories. If you’re in a higher income bracket, the tax difference between short-term and long-term can be massive.
For Ohtani’s baseball, the stakes are even higher. Since this historic item is likely to yield a high bid, the difference between the short-term and long-term capital gains tax can be the difference between walking away with a hefty payday or a reduced profit.
Capital Gains Rates in 2024: What to Know
For those planning big sales in 2024, here’s where long-term capital gains rates start based on filing status:
- Single Filers: 15% on taxable income over $47,026, 20% on income above $518,900.
- Married Filing Jointly: 15% on income over $94,051, 20% on income above $583,750.
- Head of Household: 15% on income over $63,001, 20% on income above $551,350.
If a high-value auction pushes your income above these thresholds, part of the sale may be subject to the 20% rate. However, that’s still significantly less than the short-term rate for top earners.
Timing Your Sale for Maximum Savings
Timing is everything, especially in a high-stakes auction. Selling Ohtani’s baseball just one day before reaching the one-year mark could mean forfeiting tens of thousands of dollars in additional taxes. Waiting that extra day? It could leave more money in your pocket for other investments.
Real-Life Scenario: When the Holding Period Saves Big
Consider this: If a memorabilia item like Ohtani’s baseball sells for $1 million and the seller holds onto it long enough to qualify for long-term capital gains, they could owe around $150,000 to $200,000 in federal taxes, depending on their bracket. But if they sold the item within a year, the tax burden could skyrocket to $370,000 or more.
This difference highlights how crucial it is to hold onto high-value assets for at least a year to enjoy the tax advantage of long-term gains.
The Legal Angle: Ownership Disputes and Taxation
Interestingly, this auction for Ohtani’s historic ball isn’t just about taxes. An 18-year-old has filed a lawsuit, claiming ownership of the ball, which he alleges was stolen. But here’s the twist: whether he wins or loses, the tax obligation remains. Whoever ultimately sells the ball will have to pay taxes on the sale. For the final owner, Uncle Sam is indifferent to the ownership backstory—all that matters is the taxable gain when the ball changes hands.
Takeaways for Investors and Collectors
Shohei Ohtani’s 50/50 ball is undeniably a piece of history, and the lucky owner stands to gain a significant profit. However, understanding how taxes apply to high-value memorabilia is essential for making the most of this windfall. Here are a few key takeaways:
- Hold for Over a Year: Whenever possible, hold collectibles for at least one year and two days to qualify for lower long-term capital gains rates.
- Plan for Federal and State Taxes: State tax rates vary, and some states may impose additional taxes on capital gains.
- Consult with a Tax Professional: Always consult a tax expert to understand how your specific situation might affect taxes on high-value assets.
Whether you’re an avid collector or a casual fan looking to cash in, planning your sale can help ensure you maximize your gains. Because in the world of collectibles, it’s not just about the thrill of the auction—it’s about keeping as much of that winning bid as possible.
Final Thoughts: Playing the Tax Game
In the auction world, selling a legendary item like Ohtani’s 50/50 ball is thrilling, but a savvy seller recognizes the power of timing and tax planning. For anyone hoping to score big, remember that sometimes, holding on just a bit longer can mean walking away with significantly more. When it comes to high-value memorabilia, the question isn’t just about winning the bid—it’s about winning the tax game, too.
