Elijah Wood played Frodo in the “Lord of the Rings” film trilogy.

Courtesy: New Line Cinemas

Collectors’ coveted “The Great Ring” wasn’t found in Hobbiton or deep in the tunnels of the Misty Mountains this summer; it was in Hobbiton. Nor has it been found outside the elven stronghold of Rivendell, the kingdom of Gondor, or even the Black Gate of Mordor.

it was found in toronto last month.

And ring holders – should they choose to sell the “precious” ones – could be subject to hefty taxes on their profits. Their tax rate could be as high as 53.53%.

In this case, the One Ring was not forged by the Dark Lord Sauron in the fire of Mount Doom and inspired by various creatures of Middle-earth, as author JRR Tolkien outlined in The Lord of the Rings. Coveted solid ring. trilogy.

Instead, it’s an extremely rare card in Magic: The Gathering.

Seven-figure bid seeks ‘a ring’

Wizards of the Coast — the company that created the Magic card game in 1993 — has released “Lord of the Rings themed set June, and launched the “One of One Ring” promotion. One of the packs contains “Single Ring,” a serialized card of which only one exists.

According to Wizards of the Coast, open bidding for the one-of-a-kind card has run into the millions. This card is printed on traditional foil and uses the black language of Sauron in the Tengwar alphabet.

The “One Ring” series of cards is a one-of-a-kind Magic card released in June. The collectible is part of a special edition of Lord of the Rings-themed Magic: The Gathering that has already fetched millions of dollars.

Wizards of the Coast LLC

A potential buyer — Gremio de Dragones, a gaming store in Valencia, Spain — supply 2 million euros, or about 2.2 million U.S. dollars, or 2.9 million Canadian dollars. (Its bid also included travel and lodging costs and a free paella dinner.)

Another interested group — Dave & Adam’s collectibles store near Buffalo, New York — supply 1,000,000.

Wizards of the Coast, owned by Hasbro, comfirmed As of June 30, the card had been found. discoverer (anonymous) It is said Live in Toronto, the largest city in Canada and the capital of Ontario.

The chance of finding the card is approximately One in three million. (By comparison, the odds of winning the Powerball jackpot are about One in 292 million. )

“For me, it’s almost like a lottery ticket,” says Scott Plaskett, a licensed financial planner in Toronto and managing partner and CEO of Ironshield Financial Planning.

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How Canada Taxes Capital Gains

However, unlike lottery winnings, lottery winnings are duty free In Canada – One Ring discoverers are generally required to pay taxes on the profits generated by the sale.

The United States also imposes a tax on profits, known as a “capital gains” tax. It works for stocks, bonds, real estate, collectibles, and other assets.

In both countries, taxes are judged on the “cost basis,” a term that refers to the original purchase price. Net profit is the amount left after subtracting the cost basis and other potential items such as costs incurred by the seller (such as broker fees).

But the tax systems of Canada and the United States differ in the way capital gains are taxed.

Roger Perzan poses for photos at the Toronto Fan Fair on September 4, 2015 dressed as Sauron from The Lord of the Rings.

Marta Ivanek | Toronto Star | Getty Images

Canadians who get a One Ring card are likely to pay taxes on half of their profits. Experts say the rest will be tax-free.

This is due to Canada’s use of the “Inclusion rateDepending on the circumstances, usually only a portion of the profits is accounted for (i.e. included in) as taxable income.

The share depends on how the card was acquired, Plaskett said. The inclusion rate is usually 50%, which may apply in this case, he said.

If The One Ring card sells for 2 million euros (which appears to be the highest bid at the moment), then there is a tax of 1 million euros (about 1.46 million Canadian dollars).

“We used to do that in the U.S., but that changed a few years ago,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, of omitting a portion of tax profits.

Canadian tax bill total is ‘subjective’

But what is the tax rate on profits in Canada?

Because of the huge sums involved, the seller is likely to be taxed at Canada’s highest income tax rate, experts say.

in Ontario, top tax rate It is 53.53%. This includes federal and provincial taxes.

Since only half of the seller’s profits are taxable in this example, the rough effective tax rate for the individual-to-transaction is approximately 26.8% (or half of 53.53%).Therefore, the total tax bill could be as high as approximately $780,000 In this example (approximately $588,000.)

(In reality, the effective tax rate will be slightly lower, experts say, because Canada’s income tax system is progressive, like in the US. That means most, but not all, profits here will be taxed at the top rate.)

For me, it’s almost like a lottery ticket.

Scott Plaskett

Toronto Certified Financial Planner

However, experts say there are other tax options.

For example, if a One Ring card is accidentally dropped by its owner and picked up by someone else on the street, the method of obtaining it would change, Plaskett said.

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

In some cases, Canadian law also imposes a 100 percent tax on profits, rather than 50 percent, depending on the seller’s intentions, said John Oakey, vice president of taxation at Canada Revenue Corporation. Chartered Professional Accountant of Canada.

For example, if the person who found the One Ring card was the owner of a collectibles store, and buying and selling the cards was their business, the sale might be considered a business transaction, in which case all profits would be taxed .

A silver lining as stocks slide

Still, Oakey said there is some ambiguity here. For example, what if the owner of the card (even an amateur collector) puts a lot of effort into maximizing profit by, for example, actively soliciting bids from many potential buyers?

Canada Revenue Agency (Canada’s equivalent to the Internal Revenue Service) may also treat sales In this case, as a business transaction – the full amount of $2.9 million in this case would be taxed at 53.53%.

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

How the U.S. Taxes Capital Gains

In some respects, the U.S. system is more specific, he said.

This is because the U.S. capital gains tax incentives are term-based.

Profits are not treated preferentially if assets such as stocks are purchased and held for a year or less. They are considered “short-term” capital gains and are taxed at ordinary income tax rates, which run up to 37% at the federal level.

“Long-term” capital gains apply to assets held for more than a year. They get preferential treatment.

Sir Ian McKellen as Gandalf and Elijah Wood as Frodo in The Lord of the Rings: The Fellowship of the Ring.

New Wire | WireImage | Getty Images

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