Oh, What a Difference a Day Can Make

| Business Miscellaneous, News

By W. Owen Pryor, CPA       On what appeared to be a normal day, a trip to a California junk shop proved to be life changing for one lucky customer. A seemingly innocent $2 purchase is now thought to be valued at a whopping $5 million. Turns out the decision to purchase a random black and white photo, which has been authenticated to be Billy the Kid, will now present quite a serious tax situation for the potential $4,999,998 capital gain. Let’s take a look into what this lucky customer, Randy, will need to think about for this once in a lifetime find.

There are a few ways Randy can let this situation play out. He could decide to keep the photo as a nice souvenir from his eventful trip to the junk shop, which would not produce a taxable situation. If that were the case, there would not be any tax consequences, even though it is currently valued for more than he originally paid. This type of situation is described as an unrealized gain.

If Randy were to sell the photo for a $4,999,998 profit, then he would produce a qualifying event where he would have to recognize a gain. The gain on the sale of the photo would be characterized by the IRS as a gain on a collectible taxed at 28%, along with being subject to AMT and the net investment income tax. All in all, still not a bad day of picking.

Let’s suppose a new set of facts. Instead, the gain will be triggered from the sale of a traditional capital gain property, such as a publicly traded stock. There is a million dollar question Randy must ask: “When should I sell this stock?” Let’s suppose he purchased the stock on June 1, 2013, then sold it on June 1, 2014. According to the IRS, this would qualify as a short-term gain because the holding period was one year or less. If Randy sold the stock just one day later on June 2, 2014, the sale would be considered a long-term gain. This one additional day represents close to a $1 million difference in taxes due.

Here’s why. Long-term gains (in 2014) are capped at 20%, as opposed to short-term gains, which are taxed at the taxpayer’s ordinary tax rate (up to 39.6%). The following chart will provide an illustration of the difference between long-term and short-term gains related to Randy’s situation.


While this example is on the extreme end of the spectrum, it should serve as a shocking illustration of consequences that a single day can make for a taxable event.  If you are faced with potential capital gain implications, contact Alerding CPA Group at 317-569-4181 for a consultation or visit our website:  www.alerdingcpagroup.com. We may not know our way around a junk shop, but we sure know how to minimize your tax liabilities.

W. Owen Pryor is a Tax Senior with Alerding CPA Group, an Indianapolis-based public accounting firm.

This post was written by:

W. Owen Pryor, CPA
Tax Senior

Owen’s responsibilities include performing tax consulting, planning, and return preparation. He is primarily focused on closely-held businesses and their owners. The clients Owen serves are concentrated in the manufacturing, construction, retail sales, real estate, and not-for-profit industries.