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TLDR: How do you calculate profit/loss on individual resales of a bulk purchase of goods with differing values across multiple tax years?

If I purchase a lot of 10 items in 2022 for $1,000, what's the right way to calculate profit when it comes time to do taxes?

The average cost is $100. But the actual cost (MSRP) of each differs.

So if I sell 1 item in 2022 for $1000, but its estimated value was 50% of the original bulk purchase ($500), would the profit be $900($1000-$100 average value), or $500($1000-$500 estimated % in $ of lot value).

If I sold the whole lot in the same year of purchase it would be simple (sales - purchase price), but spanning across two tax seasons I am unsure.

Gh0st
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    Tip: Tax questions require a country tag. – Chris W. Rea Dec 11 '22 at 18:29
  • Accounting questions are generally off-topic. – littleadv Dec 11 '22 at 19:10
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    Ten of the same items, or different items? And as far as selling them nezt year, this is a Solved Problem is accounting; it’s no different than any other bit of inventory you bought last year but didn’t sell until this year. The expense is registered when you buy it (lowering this year’s profit) while the income is registered next year, increasing next year’s profit. – RonJohn Dec 11 '22 at 19:32
  • Note also that profit is an aggregate number, not something you get from individual sales. But if you want to track it, and the $1000 is less than the sum of the individual MSRP values, consider the costs to be based on each item’s MSRP divided by the sum of the MSRP. – RonJohn Dec 11 '22 at 19:37
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    @littleadv this might be a case of a person buying stuff and then trying to resell it (on eBay, for example, or Craigslist). That would be on-topic. – RonJohn Dec 11 '22 at 19:39
  • @RonJohn a person buying and reselling so much stuff they can no longer track individual lots is running a business and needs an accountant and a bookkeeper. – littleadv Dec 11 '22 at 19:40
  • @littleadv you’re being too harsh on what might be a budding small entrepreneur. – RonJohn Dec 11 '22 at 19:42
  • @RonJohn there's a permanent stream of accounting students trying to have us solve their homework, this is much more likely than a budding small entrepreneur. – littleadv Dec 11 '22 at 19:45
  • @littleadv I’ve seen lots of those over the years. This might be such a situation, but it’s just as likely to be Some Guy overthinking the box of stuff he wants to sell on eBay. Better to be generous when not certain. – RonJohn Dec 12 '22 at 03:21
  • @RonJohn You're spot on. First lot of inventory im purchasing for what hopefully becomes a profitable business. You cleared up what I was really missing; Registering the expense of the lot in 2022. Then register profits in whatever calendar year they occur. – Gh0st Dec 12 '22 at 14:03
  • "Then register profits in whatever calendar year they occur." Technically -- and more than just "technically" -- you register sales in the calendar year they occur. (Profits just flow from that.) – RonJohn Dec 12 '22 at 14:58

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There are two different methods for valuing the inventory: last-in first-out (LIFO), or first-in first-out (FIFO).

Suppose you bought 10 units in 2020 for $10 each. You bought 10 more in 2021 for $15 each. You don't sell any until 2022, when you sell 5. Under FIFO, you use the cost of the first items you bought, or $10. Under LIFO, you take the cost of the last items you bought, or $15.

If you sold 11, then under FIFO you would say the cost is 10 x $10 + 1 x $15. Under LIFO you would say it is 10 x $15 + 1 x $10.

I haven't done a survey but my guess is that most companies use LIFO because this tends to spread tax liability out across many years. With FIFO you can show very small profit this year, but then next year you dig into old inventory and suddenly your taxable profits skyrockets. Arguably LIFO is better because it postpones taxable profits.

Jay
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  • When I worked at my grandfather’s business, we always tried to move the oldest stuff first. Otherwise, you’d have some decade-old product sitting at the bottom of the pile or the back corner of the warehouse. – RonJohn Dec 15 '22 at 05:08