Whether the income should be treated as a capital gain depends on the details. See https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html
If you are correct, you have received an erroneous 1099-Misc. If you received an erroneous 1099-Misc, you have several choices:
1. Ideally, you get a corrected 1099-misc
from the payer
2. Don't report it on your return. Attach a
copy of the 1099 and a statement explaining the circumstances. You can't
e-file. From the IRS instructions for form
1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been
issued in error, contact the payer. If you cannot get this form corrected,
attach an explanation to your tax return and report your income correctly.
3. Report the Income on schedule C and take
a deduction under other expenses, call it something like "1099-Misc income reported on Schedule D"
4. Report the income as misc line 21
income (enter in TurboTax at the 1099-Misc screen) .
Then enter a line 21 deduction,
for the same amount. In TurboTax (TT),
enter at:
- Federal Taxes tab
- Wages & Income
- “I’ll choose what I work on” Button
Scroll down to:
-Less Common Income
-Misc Income, 1099-A, 1099-C
- On the next screen, choose – Other
reportable income - Enter the number with a minus sign (-) in front. Briefly
explain at description. Separately report the income as a capital asset sale
5. Ignore the 1099, report the income as capital asset sale and hope you can explain it
away when & if the IRS contacts you.
