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Returning Member

Hi! Looking for answers on how best to submit income from a "side hustle..."

Hi, long story short... I recently got into the hobby of fixing watches. It started purely as a hobby, but then I started taking them apart and fixing them. I started buying huge "lots" from estate sales and on eBay. As I found watches I liked, I'd get rid of other watches that I had fixed by selling them on eBay to fund new watch purchases.

 

I started in 2019, but my costs (tools, etc.) grossly outweighed the money I made from selling them... I think I made... maybe $1,000 on watch sales last year, but probably spent twice that on the workshop I built in my garage, plus tools, and stuff.

 

This year with some of the time off I had because of COVID, I got bored and (in addition to renovating my master bathroom) fixed up MANY watches. In the past 90 days, I've collected maybe $3,600 in watch sales, and I expect that to continue through the rest of the year. My guess is I'm looking at maybe $10,000 to $15,000 in watch sales.

 

To be honest, I'm kind of getting over it, and I'll likely stop the watch hobby since I've got more watches than I know what to deal with, but the money supplements my daughter's 529.

 

 

I live in Texas, so no state income taxes. But obviously, I will have to file for Federal. What is the best way to account for this income? What deductions, if any, can I use? I do not have any kind of business, LLC, or otherwise. I'm fully employed by a company doing totally unrelated things. Do I just determine my own expenses vs income, and then just lump that in as a second source of income in my tax filing? How do I account for hours? I'd have to say that realistically, based on the average going rate, I'm probably not even breaking even if I was to charge myself a fair wage for the services. Note, I have not taken on any requests... I literally just fix watches in my spare time and sell them on eBay.

 

Would love any advice you guys might have!

 

Thanks!!!

 

1 Best answer

Accepted Solutions
Level 15

Hi! Looking for answers on how best to submit income from a "side hustle..."


@MPiling wrote:

Hi, so... definitely a hobby... but if I'm seeing this right, it looks like I'm not allowed to deduct ANY expenses AT ALL? So, I cannot even include the cost basis... as in, what I paid for the watch first before I sold it?

 

In some cases, I might have paid $55 for a watch, and sold for $275... but now I'm required to claim all $275 as income even though I spent $55?

 

Thanks... just want to double-check.


Sale of personal property is a capital gains transaction and you can subtract your basis.  You can probably also subtract costs of selling (like listing fees) since they technically reduce the selling price.  You would report the sales on Schedule D for capital gains transactions. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

5 Replies
Level 15

Hi! Looking for answers on how best to submit income from a "side hustle..."

Here is a TurboTax article and an IRS article to help you decide if you have a hobby or a business:

https://turbotax.intuit.com/tax-tips/self-employment-taxes/4-tax-tips-for-money-making-hobbies/L89qz...

 

https://www.irs.gov/spanish/hobby-or-business-irs-offers-tips-to-decide

 

If you determine you only have a hobby, you must enter the income as other income on your tax return. You can no longer deduct any expenses associated with a hobby.

 

If you determine it is a business, you would be considered self employed and would enter the income and expenses on Schedule C. You must pay self employment taxes on net income from a business. You can not enter a value for your time as a business expense. 

Returning Member

Hi! Looking for answers on how best to submit income from a "side hustle..."

Hi, so... definitely a hobby... but if I'm seeing this right, it looks like I'm not allowed to deduct ANY expenses AT ALL? So, I cannot even include the cost basis... as in, what I paid for the watch first before I sold it?

 

In some cases, I might have paid $55 for a watch, and sold for $275... but now I'm required to claim all $275 as income even though I spent $55?

 

Thanks... just want to double-check.

Level 15

Hi! Looking for answers on how best to submit income from a "side hustle..."

Let's start with some basics.

 

First, you have taxable income to report for 2019 regardless.  Any time you sell something for more than you paid for it, that creates a taxable capital gain.  If you held the property less than 1 year, the capital gains are taxed at ordinary income rates. 

 

Suppose this is a hobby.   Your income is the difference between the selling price and purchase price of the items.  You can't deduct any expenses except that you can reduce the selling price by the costs of selling (listing fees and PayPal surcharges).  It doesn't much affect your taxes if you report it as "other income" or hobby income, or as capital gains on schedule D, as long as you held the property less than 1 year.  If you held items more than one year, it's a long term capital gain and taxed at a lower rate. 

 

Suppose this is a business.  A business means an "ongoing trade or business", where you intend to earn a profit, you advertise, buy and sell inventory, and do all the other things a business typically does.  If you are a business, you can deduct expenses that are "reasonable" for your business, and that are "ordinary and necessary" for the kind of business you do.  This can include tools, shipping costs and transaction fees, and so on.  If you show a loss, you can carry that forward to the next year of the business.  If you have a profit, you pay income tax AND 15% self-employment tax on the profit (SE tax is the self-employed version of social security and Medicare tax.)  If your tools are more than $2500, you may need to depreciate them over time rather than expense them.   If you stop the business before the tools are properly depreciated, you may have to repay some of that depreciation.   You generally can't include as an expense, the cost of building a workshop in your home unless you meet all the rules for taking the "home office" deduction, more formally known as business use of your home.  The watches you buy and sell are business inventory, not capital goods, and you don't get the lower capital gains tax rate if it takes you longer than a year to sell some of your inventory. 

 

You report the business on Schedule C as part of your personal tax return.  Schedule C reports your income and expenses and calculates the profit, which is then added to any other income from jobs or investments to determine your overall income tax.  The profit also goes from schedule C to schedule SE to tack on the 15% SE tax.

 

You never take an expense or deduction for the value of your labor or time.  You are paid for the value of your time by selling items for more than they cost.  Your time is not something you can expense.   (The 30,000 foot view is that, if you took a salary out of the business as an "expense", then you have to report that as taxable income, so it's a wash at best.  If you create the business as an S corp, you may be required to take a salary and give yourself a W-2, but that is not something a typical sole proprietorship or side hustle will ever do, and it's something you should not do without extensive legal advice.)

 

The IRS takes an equally dim view of hobbies reported as businesses, and businesses reported as hobbies.  Reporting a hobby as a business may allow you to deduct expenses that can't be deducted as a hobbyist, and also creates "earned income" which can be used to qualify for things like EIC and IRA deductions.  Reporting a business as if it was a hobby may allow you to avoid the extra 15% SE tax. 

 

Once you decide if you are a hobby or business, you will need to amend your 2019 return to report income received in 2019, no matter how small.  Make sure you keep good records.  The tax code presumes all income is taxable and you have to prove otherwise.  If you sold watches totaling $5,000 but paid $,4000, for $1,000 net income, you need to be able to prove that if audited, otherwise the entire $5,000 may be taxed.   Then plan on reporting your hobby or business income for 2020 as well. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 15

Hi! Looking for answers on how best to submit income from a "side hustle..."


@MPiling wrote:

Hi, so... definitely a hobby... but if I'm seeing this right, it looks like I'm not allowed to deduct ANY expenses AT ALL? So, I cannot even include the cost basis... as in, what I paid for the watch first before I sold it?

 

In some cases, I might have paid $55 for a watch, and sold for $275... but now I'm required to claim all $275 as income even though I spent $55?

 

Thanks... just want to double-check.


Sale of personal property is a capital gains transaction and you can subtract your basis.  You can probably also subtract costs of selling (like listing fees) since they technically reduce the selling price.  You would report the sales on Schedule D for capital gains transactions. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

Returning Member

Hi! Looking for answers on how best to submit income from a "side hustle..."

Thank you, I appreciate all of the information you've given me. This is definitely a hobby, but I'm starting to realize now that it's edging on the side of a business, and that's not a road I want to go down. I started it to have fun, and it's taking up more time than I'd ideally like for it to. I'm going to read through all of this. I'm at the point that I'm looking for the easiest way to put this in, with the least complication... not necessarily the tax shelter aspect of it as this additional income won't have any effect on my overall bracket. I did buy most of these watches in early 2019, then went overseas for work for 6 months, and only started working on them again. I'm right AT a year... so it's cutting it. I definitely have good records as everything sold was through eBay, and all transactions were through PayPal. Only 2/3rds of my purchases were through eBay though.

 

Thank you again!

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