The one ring that collectors were coveting this summer was not found in Hobbiton or deep in the tunnels of the Misty Mountains; nor was he discovered in the elven fortress of Rivendell, the realm of Gondor, or even beyond the Black Gates of Mordor.

Was found in Toronto last month.

And the wearer of the ring – if he decides to sell the “precious” – could owe a hefty tax bill on profits. Their tax rate could be as high as 53.53%.

In this case, the One Ring is not a physical ring forged by the Dark Lord Sauron in the flames of Mount Doom and sought after by all kinds of creatures in Middle-earth, as outlined in “The Lord of the Rings” by author JRR Tolkien. trilogy.

Instead, it is very rare playing card in “Magic: The Gathering.”

Wizards of the Coast – the company that created the Magic card game in 1993 – released “Lord of the Rings themed set in June and featured a “One of One Ring” promotion. One pack contained the “One Ring”, a serialized card of which only one exists.

Public bidding for the one-of-a-kind card — printed in traditional foil and in the Black Speech of Sauron using the Tengwar script, according to Wizards of the Coast — has run into the millions of dollars, according to Wizards of the Coast.

One potential buyer — Gremio de Dragones, a gaming store based in Valencia, Spain — he offered 2 million euros, about $2.2 million or 2.9 million Canadian dollars. (His offer also included travel and accommodation costs and a free paella dinner.)

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

Wizards of the Coast, which he owns Hasbro, confirmed the card was found as of June 30. The finder — who remains anonymous — supposedly lives in Toronto, Canada’s largest city and the capital of the province of Ontario.

There was a chance to find the card roughly 1 in 3 million. (For comparison, the odds of winning Powerball jackpot they are O 1 in 292 million.)

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

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However, unlike lottery wins — which are exempt from tax in Canada — The finder of the One Ring would generally owe tax on the profits from the sale.

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

In both countries, tax is assessed on the basis of “cost”, a term that refers to the original purchase price. Net profit is the amount remaining after deducting the cost basis and other potential line items such as costs incurred by the seller (such as a broker’s fee).

However, the Canadian and American tax systems differ in how they collect tax on capital gains.

A Canadian who got The One Ring card would most likely pay tax on half of their winnings. The rest would be tax-free, experts said.

This is due to Canada using the “degree of inclusionDepending on the scenario, only a portion of profits is usually counted (i.e. included) as taxable income.

The share depends on how the card was acquired, Plaskett said. The inclusion rate is generally 50% – and that would likely be true in this scenario, he said.

If The One Ring were to sell for €2 million – which appears to be the current highest bid – then €1 million (about CA$1.46 million) would be taxable.

“We used to do it that way in the U.S., but we changed it a few years ago,” Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, said of leaving the profit share out of taxes.

In Ontario, highest tax rate is 53.53%. This includes both federal and provincial taxes.

Since only half of the seller’s profit would be taxed in this example, the individual’s effective back-of-the-envelope tax rate on the transaction would be about 26.8% (or half of 53.53%). So the total tax bill could be up to roughly CA$780,000 in this example (which translates to about $588,000.)

(In reality, the effective tax rate would be slightly lower because Canada’s income tax system is progressive, like the U.S., experts said. That means most, but not all, profits here will be taxed at the highest rate.)

However, according to experts, there are alternative tax scenarios.

For example, if The One Ring card were accidentally dropped by its owner and subsequently picked up by someone else on the street, the method of acquisition would change, Plaskett said.

The incorporation rate would likely jump to 100% in that case, meaning all profits would be taxed at 53.53%, doubling the total tax bill, he said.

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

For example, if the person who found The One Ring card was the owner of a collector’s shop – and the buying and selling of the cards was their business – the sale may be intended to be a business transaction, in which case all profits would be taxed.

However, there is some ambiguity, Oakey said. For example, what if the cardholder – even if he was a hobbyist collector – made a significant effort to maximize his profit by, among other things, proactively soliciting offers from many potential buyers?

Canada Revenue Agency (Canada’s equivalent of the IRS) can also treat sales as a business transaction in this case — in which case the entire CA$2.9 million would be taxed at a rate of 53.53%.

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

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

The One Ring card would “almost certainly be considered a collector’s item,” said Joe Hughes, a federal policy analyst at the Institute on Taxation and Economic Policy.

For example, a Michigan dealer would pay the highest long-term capital gains rate of about 36% for a collectible, Hughes said. The gross total tax on the highest bid of $2.2 million would be about $792,000 in this example.

In a state like Tennessee that does not collect state income tax, the top long-term capital gains rate would be 31.8%.

In other words: The ring bearer seems to be doing better in Canada than in the US – from a tax rate perspective, anyway.

Of course, whether the Ringwraiths will descend upon the ring bearer from the lair of Minas Morgul, or whether the men caught in the ring’s evil, destructive grip will attempt to wrest it from the ring bearer’s grasp, this publication cannot say.