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The Tax Trap Behind Shohei Ohtani’s 50/50 Ball Auction – Uncle Sam Could Be the Real Winner

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The Tax Trap Behind Shohei Ohtani’s 50/50 Ball Auction – Uncle Sam Could Be the Real Winner

Imagine you’re the lucky fan holding onto the ball that Shohei Ohtani crushed to become the first player in baseball history to hit 50 home runs and steal 50 bases in a single season. It’s not just any ball – it’s a piece of MLB history. And now that historic baseball is up for auction. The bids are expected to skyrocket, with collectors clamoring to own even the smallest part of Ohtani’s legendary career with the Los Angeles Dodgers. But if you think this is a golden opportunity for the seller, hold your horses – or, rather, your baseballs – because 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

Here’s where things get tricky: If you sell any valuable item within a year and a day (yes, the IRS is that specific) of snagging it, the IRS doesn’t care how historic or valuable it is – they care how long you’ve owned it. If you offload it too quickly, the IRS considers it ordinary income, meaning it gets taxed just like your salary or any other earnings. For those in higher income brackets, that could be as much as 37% in taxes!

To put that into perspective, let’s say the final net auction price is only $500,000 (though it will be much higher in actuality). If the sale goes through before the seller has owned the ball for a year and a day, he will be taxed at ordinary income rates. Assuming you’re in the top tax bracket (and, if you’re making half a million or more from a baseball, you might be), you could owe a whopping $185,000 in federal taxes! That means instead of walking away with half a million bucks, you’re looking at around $315,000 after taxes.

And, all of this is without considering any state income tax that may apply.

Long-Term Capital Gains: The Real Home Run

If you can play the waiting game and hold onto an item for at least a year and a day  before selling it, you’ll be rewarded with a much more favorable tax situation. The profit from selling the ball will be taxed at long-term capital gains rates, which are significantly lower than ordinary income tax rates. Depending on your income bracket, that tax rate could be as low as 15% or as high as 20%.

Using the same example of a $500,000 sale, the seller would only owe between $75,000 and $100,000 in federal taxes. That leaves behind a much nicer net profit, ranging from $400,000 to $425,000.

How Does This Work?

Why the big difference? The IRS distinguishes between short-term and long-term capital gains based on how long you hold onto an asset before selling it. For most items – like stocks, real estate, and even historic baseballs – you need to hold onto the item for more than a year (technically,a year and a day) for the profit to be considered a long-term capital gain. Anything sold within a year is classified as a short-term capital gain and is taxed like ordinary income.

This means the IRS treats you differently if you’re a quick-flip kind of person versus someone who holds onto assets for the long haul. While this might not make a huge difference when selling smaller items, when we’re talking about hundreds of thousands – or even millions – of dollars, the difference in taxes can be enormous.

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.

So if the auction pushes you into a higher income bracket, you could be looking at that 20% tax rateon part of the sale. But again, that’s still a far cry from the 37% you’d pay if you sold it before the year mark!

As tempting as it might be for the seller to cash in on the Ohtani ball as quickly as possible – especially with the buzz around the auction – a little patience could save hundreds of thousands of dollars in taxes. This is one of those times whereholding out for just one more day can make all the difference. After all, isn’t a little extra time worth an additional $100,000+ in your pocket?

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!

Shohei Ohtani’s 50/50 ball is a piece of sports history, and the lucky person auctioning it off could stand to make a huge profit. When it comes to taxes, timing is everything. So, whether you’re planning to sell sports memorabilia soon or just a fan dreaming of hitting it big, don’t forget to consult your tax professional before making any major moves. Because in the end, it’s not just about the big win – it’s about how much of that win you get to keep!

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