Suppose you are the fortunate spectator who managed to hold on to the ball that Shohei Ohtani hit so hard that he became the first player in baseball history to steal 50 bases and hit 50 home runs in one season. It's a piece of MLB history, not just any ball. And that vintage baseball is currently being auctioned off. Collectors will be vying for even the tiniest piece of Ohtani's illustrious history with the Los Angeles Dodgers, so anticipate the bidding to soar. Hold your horses, or rather, your baseballs, if you believe this is a great chance for the seller, since Uncle Sam is waiting in the dugout.
Before you start imagining what you'd do with your wild payday - bidding for the ball was up to $1.2 million
as of September 28 - you might want to check the calendar and brush up on your tax rules. If a person sells any piece of memorabilia too soon, a massive slice of the financial windfall could be headed straight to the U.S. Treasury.
Short-Term Capital Gains: A Tax Curveball You Don't Want
This is where the difficulties arise: The IRS doesn't care how precious or historic an object is; what matters is how long you've held it, if you sell it within a year and a day (yes, the IRS is that particular). The IRS views it as regular income, which means it is subject to taxes similarly to your wage and other profits, if you dump it too soon. For those in higher income levels, the tax burden might reach up to 37%!
Let's take an example where the ultimate net auction price is merely $500,000 to put it into perspective (though it will be considerably more in practice). The seller will be subject to ordinary income tax rates if the deal closes before he has possessed the ball for a year and a day. You may owe a staggering $185,000 in federal taxes if you're in the highest tax rate, which you might be if you make half a million or more on a baseball. That implies you're looking at about $315,000 after taxes rather than taking home a half a million dollars.
Furthermore, none of this takes into account any potential state income tax.
Long-Term Capital Gains: The Real Home Run
A far more advantageous tax situation will be yours if you can master the waiting game and hang onto an item for at least a year and a day before selling it. Long-term capital gains rates apply to the earnings from selling the ball; these rates are far lower than regular income tax rates. That tax rate might be as low as 15% or as high as 20%, depending on your income level.
In the identical $500,000 sale scenario, the seller's federal tax liability would be limited to $75,000 to $100,000. A far better net profit, ranging from $400,000 to $425,000, is left over as a result.
How Does This Work?
Why is there such a large difference? The length of time you keep an item before selling it determines whether you have a short-term or long-term capital gain, according to the IRS. The majority of assets, including stocks, real estate, and even vintage baseballs, need you to hang onto the profit for a period longer than a year—technically, a year and a day—in order for it to qualify as a long-term capital gain. Anything sold in less than a year is considered a short-term capital gain and is subject to regular income taxation.
This implies that the IRS will handle you differently depending on whether you're a long-term asset holder or a rapid flipper.
The Numbers: 2024 Capital Gains Rates
For 2024, here's where the capital gains tax rates kick in for long-term assets:
- Single Filers: 15% rate applies to taxable income over $47,026, and the 20% rate applies to income over $518,900 .
- Married Filing Jointly: 15% rate starts at $94,051 , and 20% kicks in above $583,750.
- Head of Household: 15% rate starts at $63,001 , and 20% applies once income exceeds $551,350.
Therefore, you may be subject to the 20% tax rate on a portion of the sale if the auction forces you into a higher income band. However, that still pales in comparison to the 37% you would have to pay if you had sold it before the year was over!
Even while the seller could be tempted to take advantage of the Ohtani ball as soon as possible given the excitement surrounding the auction, a little perseverance might prevent hundreds of thousands of dollars in taxes. Holding out for one more day can make all the difference in situations like this one. Ultimately, isn't an extra hundred thousand dollars in your wallet not worth a little bit more time?
Oh, and speaking of holding onto things, there's some legal drama in the air. An 18-year-old is claiming that the ball up for auction was actually his . According to reports, he's filed a lawsuit alleging the ball was stolen from him. Whether he wins or loses that battle, one thing's for sure: Uncle Sam doesn't care about ownership disputes - whoever ends up selling the ball is going to have a tax bill waiting for them!
An enormous profit might be possible for the fortunate individual who auctions off Shohei Ohtani's 50/50 ball, a piece of sports history. Time is crucial when it comes to taxes. Therefore, before making any significant decisions, whether you're a fan hoping to become wealthy or planned to sell sports memorabilia in the near future, don't forget to speak with a tax expert. Because, in the end, what matters isn't so much the huge victory as it is how much of that victory you get to keep!
