Hello, I'm not sure if this question has already been asked. I'm selling portions of collectibles I've had over the years to pay for medical bills, food, rent etc. Some of my collectibles are worth a lot of money and some not. I primarily sell through PayPal goods and services but I am not selling as business to make profit. My question is how would this be reported considering purchases were made years prior and would I be penalized and forced to pay taxes on it?
The IRS has specific guidelines for determining if an activity is a hobby or business. This is an article that discusses when your hobby is a business or vice versa: When the IRS Classifies Your Business as a Hobby If your sale of collectible items is classified as a hobby by the IRS, then the excess of income over the cost of the collectibles sold will be taxable. However, hobby income is not subject to self-employment taxes. Also, the cost of the collectibles you sell and the expenses you incur can never be greater than the revenue received from their sale. Or in other words, you cannot take a hobby loss on your income tax return.
Collectibles are discussed in Internal Revenue Code Section 408(m). This code section lists items determined by law to be collectibles: work of art, rug or antique, metal or gem, stamp or coin, or alcoholic beverage. Are the collectibles you're selling included in this list? The IRS does not provide criteria about how to determine if an item you hold would be considered a collectible by the IRS if it's not on this list. However, income received from selling defined collectible items are classified as a long-term gain or loss.
To summarize, if the income you receive from selling collectibles is greater than the cost of those items and the expenses you incur in selling them, you will have taxable income that needs to be reported on your tax return. And finally, you would need to make an effort to determine the original cost or fair market value of the collectibles you're selling.
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Because a 1099-K will probably be issued, you have to deal with this on your tax return, but the 1099-K by itself does not mean the money is taxable. It depends on what you did to get the money.
You might be selling as a business or a hobby. Since one of the key factors for treating your income as business income is the desire to make a profit, selling old items for less than their purchase price is not a business for tax purposes. However, if you mix selling old and new items for profit, then you have a business, and the answer below does not apply.
Selling tangible personal property is a capital transaction reported on form 8489 and schedule D. If you sell for more than your cost basis, you have a capital gain. If you sell for less than your basis, you have a capital loss. However, capital losses on personal property are not deductible and do not offset your gains. So if you sell 10 items with a combined loss of $1000 and one item with a gain of $10, you have a $10 capital gain.
You need a spreadsheet listing your items with a description, date purchased, cost when new, date sold, and selling price. If you don't have receipts, make your best guess and hope you aren't audited. Without proof of your cost, the IRS would be allowed to disallow your costs and declare the entire proceeds as taxable income. A listing made at the time of sale is better than nothing, but not as good as receipts. Basically, do the best you can. The more complete and businesslike your records, the more the likely auditor is to cut you some slack if some of your items are less-well documented. Keeping your listings may help as well, if you are listing items as used, that will help to establish they were your previously purchased used items. Without good records, you have to hope not to get unlucky, and do the best you can.
An easier, but less correct way, would be to combine all the sales of items sold at a profit and list it as hobby income. Ignore the sales of items sold for less than you paid. This way you only enter 1 item on your tax return instead of many, but you pay higher income tax since capital gains have a lower rate.
On your tax return, there are two ways of dealing with the 1099-K. There may be a new procedure for 2022 since so many more people will be getting 1099-K forms, we don't know yet. These are the old procedures.
1. Leave the 1099-K off your return. Report your sales as capital transactions on schedule D. File by mail and include a written explanation of why you left off the 1099-K.
2. Enter the 1099-K as "other income." Then create a negative item of other income to offset the 1099-k. Enter your sales as capital transactions, and e-file. The IRS may as later for an explanation of the negative item, you would reply with a letter of explanation and a copy of your records.