1099's, Reporting Online Sales to IRS and Other Bad News

caannie

Mother of Dachshunds
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Mar 28, 2006
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Montgomery, AL
I've been researching the tax code regarding online sales for the last few days and the news isn't good. In fact if you do a lot of online selling you might not even want to read this because it's going to ruin your day.

We all have heard of about the $20,000 and 200 transactions limit with the IRS for eBay or PayPal to give you a 1099. Of course that doesn't mean you can sell $20,000 worth of items and not report it on your taxes. Apparently the threshold has always been $600, it's just the IRS wasn't making places like PayPal send you a 1099 for it. But that's going to change in 2022.

While I have no problem paying taxes on the profits I make selling something online, unfortunately it doesn't exactly work that way. Most of us would fall into what the IRS calls "hobby sellers." Those are people who collect things and then occasionally sell them to pay for other things. Unfortunately the IRS changed the rules in 2018 where hobby sellers have to claim all the money they make online but aren't able to deduct the cost of the item. So if you sell $20,000 worth of purses and you paid $24,000 for them, you still have to claim the whole $20,000 and pay taxes on it. Now maybe I'm reading this wrong and hopefully someone can correct me. Please, if you have any knowledge as a tax professional, tell me I'm wrong.

Your other option is to call yourself a business and in that case you can deduct the cost of business and the value of the items and not make a profit. But from what I've been reading the IRS is really likely to audit you as a small business to make sure you're not really just a hobbyist. And one of the things they look for is did you make a profit in the last 2 out of 5 years. To be a considered a business you have to have made a profit. I don't know about y'all but most of the time I don't make a profit on anything.

The third option I have read about but haven't actually confirmed in the tax code is what the IRS calls "garage sale sellers." These are people who buy something for their own personal use and then occasionally clean out their house and sell the stuff for a loss. I would like to consider myself in that category because what I buy I usually buy to keep. Supposedly garage sale sellers don't have to claim their online sales because there's no profit. That would fit my situation but they don't stipulate a maximum dollar amount or anything like that.

I think the IRS would prefer to call most of us hobbyists. And now is not a good time to be a hobbyist. Hobbyists will not be allowed to deduct the cost of their items on their taxes again until after 2025. And it doesn't seem fair if you're cleaning out your stuff and taking a loss that you should have to pay more when you're not making any profit at all. I guess we can all just hope we're considered garage sale sellers.

If there's anyone on this board who's a tax professional or can give more information about this I would be greatly appreciative. I always assumed it was only fair that you would pay taxes on a profit but it seems like the IRS wants you to pay taxes whether you turn a profit or not.

I'd like to add if you're selling on eBay you could probably make a case that you are a business. But I'm not sure how the IRS views people who sell their unwanted bags to consignment stores online. Again I'm hoping they would consider that a garage sale.
 
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lill_canele

Member
Jun 21, 2021
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Interesting read. Not a tax person by any means but looked a bit around on the internet and here's some info that I found.
(most of it is the same as what you said)

http://www.nolo.com/legal-encyclopedia/when-do-you-need-file-form-1099-misc.html

http://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-an-irs-1099-form/L3NxSPMUe#

http://ttlc.intuit.com/community/taxes/discussion/how-do-i-declare-hobby-income/00/765831
(this is for turbo tax only but perhaps other e-tax filing systems have something similar)
 
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youngster

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Apr 18, 2007
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The third option I have read about but haven't actually confirmed in the tax code is what the IRS calls "garage sale sellers." These are people who buy something for their own personal use and then occasionally clean out their house and sell the stuff for a loss. I would like to consider myself in that category because what I buy I usually buy to keep. Supposedly garage sale sellers don't have to claim their online sales because there's no profit. That would fit my situation but they don't stipulate a maximum dollar amount or anything like that.
The question of "business" versus "hobby" does not come into play when you are merely selling your own personal belongings in the online equivalent of a garage sale and taking a loss on each item. You are not running a business with a profit motive. So, there is no need to report the "gross amount of payments" received from any form 1099-K's from Ebay, Paypal, etc. You are not turning a profit. You are just unloading personal property at a loss. So, just keep detailed records of what you sold and what each of those items originally cost in case you do get some automatic form letter from the IRS. Then you can easily prove that the cost of the items sold far exceeded the gross amount of payments that you received. If you want to be very proactive, you could discuss with your accountant reporting the gross amount of payments received in Miscellaneous Income as "Personal Property Sold" and then report a separate, negative line item, to off-set that amount as "Cost of Personal Property" (or some wording like that) so that it nets out to zero additional income being added to your total gross taxable income for the year.

This change to the 1099-K reporting rules is designed to catch those people who are actually running a business, which could include picking up stuff on the cheap and selling it for a profit consistently. It would definitely catch all those handbag resellers out there who buy a Chanel flap from NM and sell it for $1,000+ over retail via some online platform.
 

caannie

Mother of Dachshunds
O.G.
Mar 28, 2006
2,675
1,084
Montgomery, AL
The question of "business" versus "hobby" does not come into play when you are merely selling your own personal belongings in the online equivalent of a garage sale and taking a loss on each item. You are not running a business with a profit motive. So, there is no need to report the "gross amount of payments" received from any form 1099-K's from Ebay, Paypal, etc. You are not turning a profit. You are just unloading personal property at a loss. So, just keep detailed records of what you sold and what each of those items originally cost in case you do get some automatic form letter from the IRS. Then you can easily prove that the cost of the items sold far exceeded the gross amount of payments that you received. If you want to be very proactive, you could discuss with your accountant reporting the gross amount of payments received in Miscellaneous Income as "Personal Property Sold" and then report a separate, negative line item, to off-set that amount as "Cost of Personal Property" (or some wording like that) so that it nets out to zero additional income being added to your total gross taxable income for the year.

This change to the 1099-K reporting rules is designed to catch those people who are actually running a business, which could include picking up stuff on the cheap and selling it for a profit consistently. It would definitely catch all those handbag resellers out there who buy a Chanel flap from NM and sell it for $1,000+ over retail via some online platform.
Thank you!!
 

youngster

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Apr 18, 2007
7,064
13,950
I'm not sure it will make much of a difference at all. A few small sellers who are just unloading personal property might stop selling entirely as they don't want the hassle of dealing with the extra forms they might receive. I plan to stop selling at the end of the year as I've got seller fatigue and I've pretty much cleaned out everything that needs to go.

But, if people are running an actual, for profit business, they will have been reporting their sales and paying income tax every year. Receiving 1099K's shouldn't change anything for them as they should have been reporting the same information. It just gives the IRS an easy way of verifying their activity and amounts. It will likely force a few sellers who might have been running a business on the side and who weren't reporting their sales and income to come clean and start reporting sales.
 
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