The magic One Ring card could fetch $2 million and a big tax bill

The one ring collectors coveted this summer wasn’t found in Hobbiton or the tunnels of the Misty Mountains; Nor was it found in the elven fortress of Rivendell, in the kingdom of Gondor, or even beyond the black gates of Mordor.

It was found in Toronto last month.

And the holder of the ring – if he chooses to sell “expensive” – ​​is obliged to pay a large profit tax. Their tax rate can reach 53.53%.

In this case, The One Ring is written by Lord of the Rings author J.R. As seen in Tolkien’s The Lord of the Rings, it is not the physical ring that was struck by the Dark Lord Sauron in the fires of Mount Doom and desired by all the creatures of Middle-earth. trilogy.

Instead, it’s a very rare game card from Magic: The Gathering.

Wizards of the Coast – the company that created the 1993 Magic playing card game – released a Lord of the Rings themed set in June and introduced the One of the Ring promotion. A serialized card with only one per deck was the One Ring.

According to Wizards of the Coast, open bidding for the unique card, printed on traditional foil and emblazoned with the Dark Word of Sauron in Tengwar letters, has fetched millions of dollars.

The potential buyer – Gremio de Dragones, a game store based in Valencia, Spain – offered 2 million euros, or about $2.2 million, or 2.9 million Canadian dollars. (His offer includes travel and lodging expenses and a free paella lunch.)

Another interested party – Dave & Adam’s, a collectibles store near Buffalo, New York – offered $1 million.

owned by Wizards of the Coast Hasbroconfirmed that the card was found on June 30. The man, whose name remains unknown, will live in Toronto, Canada’s largest city and the capital of Ontario.

The chances of finding the card were about 1 in 3 million. (By comparison, the odds of winning the Powerball jackpot are about 1 in 292 million.)

“To me, it’s the equivalent of a lottery ticket,” said Scott Plaskett, a certified financial planner and managing partner in Toronto and CEO of Ironshield Financial Planning.

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However, unlike lottery winnings, which are tax-free in Canada, the inventor of The One Ring would normally have to pay tax on the proceeds of the sale.

The United States also imposes a tax on profits called a “capital gains” tax. It applies to stocks, bonds, real estate, collectibles and other assets.

In both countries, tax is assessed on a “cost basis” relative to the original purchase price. Net profit is the amount left over after deducting the cost basis and other potential net items such as costs incurred by the seller (such as broker’s fees).

But the Canadian and US tax systems differ in how capital gains taxes are levied.

Canadians who receive The One Ring card will likely pay taxes on half of their profits. The rest are not taxed, experts say.

This is due to Canada’s use of an “inclusion factor”. Depending on the scenario, usually only a portion of the profit is counted (ie included) as taxable income.

The contribution depends on how the card was acquired, Plaskett said. The connection rate is usually 50% and can be used in this scenario, he said.

If The One Ring card sells for €2 million – which appears to be the current best offer – €1 million (about C$1.46 million) will be taxed.

“That’s what we used to do in the United States, but that changed a few years ago,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. share of the tax benefit.

But what is Canada’s corporate income tax rate?

Because of the large amount of money, the seller could be taxed at the highest tax rate in Canada, experts say.

The highest tax rate in Ontario is 53.53%. This includes federal and provincial taxes.

In this example, since only half of the seller’s profit is taxable, the individual’s effective back-of-the-envelope tax rate for the transaction is approximately 26.8% (or half of 53.53%). Thus, the total tax bill could reach approximately CAD 780,000. in this example (which means about $588,000).

(Actually, experts say, the effective tax rate would be slightly lower because Canada’s income tax system is as progressive as that of the United States. This means that most, but not all, of the profits here are taxed at the highest rate.)

However, there are alternative scenarios for taxation, experts say.

For example, if The One Ring card is accidentally dropped by its owner and then someone else picks it up off the street, the method of obtaining it changes, Plaskett said.

In that case, the top-up rate could rise to 100%, meaning all profits would be taxed at 53.53%, doubling the total tax bill, he said.

In some cases, Canadian law taxes 100% of the profit (instead of 50%) depending on the seller’s intent, said John Oakey, vice-president of tax at Chartered Professional Accountants Canada.

For example, if the person who found The One Ring card owns a collector’s shop and it is their business to buy and sell cards – the sale may be treated as a business transaction, in which case all profits are taxable.

However, there is some ambiguity here, Oakey said. For example, what if the cardholder, even if he is an avid collector, actively solicits referrals from as many potential buyers as possible to maximize his profits?

The Canada Revenue Agency (Canada’s equivalent of the IRS) may treat the sale as a business transaction in which case the C$2.9 million is taxed at 53.53%.

“It’s a subjective field,” Oakey said. “It’s not black and white.”

In some ways, the US system is more specific, he said.

This is because the preferential treatment of capital gains taxation in the US is based on duration.

If an asset such as a stock is purchased and held for one year or less, the gain is not given preferential treatment. They are treated as “short-term” capital gains taxed at ordinary tax rates, which can be as high as 37% at the federal level.

“Long-term” interest applies to assets held for more than one year. They are given discounts.

However, there is a difference between collectibles and assets such as stocks. Shares are taxed at a federal long-term capital gains tax rate of 20%; but collectibles have a maximum rate of 28%. (In both cases, there is a 3.8% net investment income tax for high earners, in addition to any state and local capital gains taxes.)

Joe Hughes, a federal policy analyst at the Institute on Taxation and Economic Policy, said the One Ring card is “definitely considered a collector’s item.”

For example, a seller in Michigan pays a long-term assessment rate of about 36% on a collection, Hughes said. In this example, the total tax on the best offer of $2.2 million would be approximately $792,000.

A state like Tennessee with no income tax has the highest long-term capital gains of 31.8%.

In other words: the ring bearer seems to be doing better in terms of tax rates in Canada than in the US.

Of course, if the ring falls from Minas Morgul’s lair to the ring bearer, or if people who fall into the ring bearer’s evil and perverse hands try to snatch it from the ring bearer. ring, this publication cannot tell.