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guitar289403
Returning Member

Purging belongings eBay - 1099-k and taxes

Researched but can't find a definite answer. 2020 brought big changes, I decided to live a minimal life and follow a dream. I have acquired a lot of musical equipment over the years, and I am looking to sell most of it on eBay. I plan on selling this in August and September of this year.

 

I have always been a W2 employee with simple tax returns - never owned a business or been independently employed.

 

These sales will most definitely throw me over the 200 item and $20,000 threshold. But I will be selling at a loss, and there will be no profits made. I have read in some places don't bother reporting it, but that makes me uncomfortable getting a 1099-k and not reporting it. 

 

From what a friend told me, I should put this under less common income. To put it as misc. Income, other reportable income. From there I should put my 1099-k as I got it, then add a new line for the same amount but negative called "Cost of Personal Property".

 

Can someone confirm if this is correct, or what route I should take? I want to unload my belongings at a loss and do things fairly, without the IRS eventually contacting me.

 

Thanks! 

1 Best answer

Accepted Solutions
Opus 17
Level 15

Purging belongings eBay - 1099-k and taxes

You should not owe income tax on this money presuming that you are selling the items for less than your original cost. However, if you have not kept proper records, and can’t show them to the IRS if audited, you are likely to be hit with a big tax bill.  There was a tax court case a few years ago involving a person who also happened to be an IRS employee, who made large eBay sales and claimed that she was selling personal items at less than her cost. She didn’t have the records to prove it, and ended up being assessed a large tax bill.

 

If you are only selling items for less than your cost, you technically don’t have to report the income at all. One of your options would be to leave the 1099-k off your return. You would have to file by mail, and attach a copy of the 1099-K and a written statement explaining that you were only selling personal items for less than your original cost and that the income is therefore, not taxable. You would have to be prepared to prove that with an inventory and other records, if you are later audited.

 

A second way to file would be to include the 1099-k as “other income“, and then create an item of other income that was a negative offset to zero out the income. This would allow you to e-file, but it will almost certainly result in an IRS letter and you would have to then prove again, that you were only selling items for less than your original cost.

 

A third way to file is to use a schedule C as suggested by the other expert. You would list the sales proceeds from the 1099-k, and then you would list the cost of your inventory to be the same as the proceeds.  You should not list the items’ real cost. If you do, then you will show a business loss which TurboTax would deduct against your other income. But this is not proper if you are only discarding excess personal items and are not actually engaged in a “ongoing trade or business.“  To avoid creating a deductible loss on the business, you would be sure to make the cost of inventory match the proceeds.

 

A fourth way to report the income would be to report your activity as a “ongoing trade or business“ on a schedule C.  If you have a business, then you report the sales proceeds, and you can deduct your expenses, which includes shipping, transaction fees, and the cost of your inventory. If you have a business, and you have a legitimate business loss, you can deduct this against your other income.  To have an ongoing trade or business, you must be engaged in business activities for a profit motive. This would include doing things like advertising, acquiring new customers, buying and selling inventory, and doing other business-like activities.  This might be the case for example, with someone who starts out on eBay by selling their own used items, but then discovers that they can make money by buying inventory at garage sales and closeout sales and then reselling it for a profit.  It doesn’t sound like you are trying to do this, but I include it for the sake of completeness.  There is also a complication, in that personal items held for more than one year, that are converted to business use, would be treated as capital sales rather than ordinary income sales on the tax return.  I don’t think you are trying to do this, and so you should probably stay away from the whole idea of reporting this as an ongoing trade or business. If you want to do that, you may need to seek professional assistance.

 

In all of the above examples, you must have accurate and complete records for each item you sell, including the date you purchase the item and the price you paid, or at least the approximate date and approximate price as best you can remember. Finding old credit card statements or old receipts would be very helpful here.  Put together a list, or a spreadsheet, with as much back up documentation as you can find.  If you are audited, you have the burden to prove that you are selling your own personal items at less than your original cost. If you can’t prove this to the auditors satisfaction, you can be assessed income tax based on the amount of the sales proceeds.

*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

9 Replies
Critter-3
Level 15

Purging belongings eBay - 1099-k and taxes

Technically you will complete a Sch C and enter the income reported and then enter the cost of good sold (inventory) to zero out the income. 

Critter-3
Level 15

Purging belongings eBay - 1099-k and taxes

Entering any amount more than $400  as other income on the Sch 1 line 8 will get you an IRS letter so use the Sch C instead to stay in their good graces. 

guitar289403
Returning Member

Purging belongings eBay - 1099-k and taxes

So is my best best here to put the info into a schedule C?

 

Would putting that I made no profit trigger anything from IRS?

Critter-3
Level 15

Purging belongings eBay - 1099-k and taxes

Nope ... just use the Sch C but do NOT show a loss.  

guitar289403
Returning Member

Purging belongings eBay - 1099-k and taxes

Thanks for the support - so if my 1099-k Says $23,000 - I should put exactly $23,000 as the cost?

Opus 17
Level 15

Purging belongings eBay - 1099-k and taxes

You should not owe income tax on this money presuming that you are selling the items for less than your original cost. However, if you have not kept proper records, and can’t show them to the IRS if audited, you are likely to be hit with a big tax bill.  There was a tax court case a few years ago involving a person who also happened to be an IRS employee, who made large eBay sales and claimed that she was selling personal items at less than her cost. She didn’t have the records to prove it, and ended up being assessed a large tax bill.

 

If you are only selling items for less than your cost, you technically don’t have to report the income at all. One of your options would be to leave the 1099-k off your return. You would have to file by mail, and attach a copy of the 1099-K and a written statement explaining that you were only selling personal items for less than your original cost and that the income is therefore, not taxable. You would have to be prepared to prove that with an inventory and other records, if you are later audited.

 

A second way to file would be to include the 1099-k as “other income“, and then create an item of other income that was a negative offset to zero out the income. This would allow you to e-file, but it will almost certainly result in an IRS letter and you would have to then prove again, that you were only selling items for less than your original cost.

 

A third way to file is to use a schedule C as suggested by the other expert. You would list the sales proceeds from the 1099-k, and then you would list the cost of your inventory to be the same as the proceeds.  You should not list the items’ real cost. If you do, then you will show a business loss which TurboTax would deduct against your other income. But this is not proper if you are only discarding excess personal items and are not actually engaged in a “ongoing trade or business.“  To avoid creating a deductible loss on the business, you would be sure to make the cost of inventory match the proceeds.

 

A fourth way to report the income would be to report your activity as a “ongoing trade or business“ on a schedule C.  If you have a business, then you report the sales proceeds, and you can deduct your expenses, which includes shipping, transaction fees, and the cost of your inventory. If you have a business, and you have a legitimate business loss, you can deduct this against your other income.  To have an ongoing trade or business, you must be engaged in business activities for a profit motive. This would include doing things like advertising, acquiring new customers, buying and selling inventory, and doing other business-like activities.  This might be the case for example, with someone who starts out on eBay by selling their own used items, but then discovers that they can make money by buying inventory at garage sales and closeout sales and then reselling it for a profit.  It doesn’t sound like you are trying to do this, but I include it for the sake of completeness.  There is also a complication, in that personal items held for more than one year, that are converted to business use, would be treated as capital sales rather than ordinary income sales on the tax return.  I don’t think you are trying to do this, and so you should probably stay away from the whole idea of reporting this as an ongoing trade or business. If you want to do that, you may need to seek professional assistance.

 

In all of the above examples, you must have accurate and complete records for each item you sell, including the date you purchase the item and the price you paid, or at least the approximate date and approximate price as best you can remember. Finding old credit card statements or old receipts would be very helpful here.  Put together a list, or a spreadsheet, with as much back up documentation as you can find.  If you are audited, you have the burden to prove that you are selling your own personal items at less than your original cost. If you can’t prove this to the auditors satisfaction, you can be assessed income tax based on the amount of the sales proceeds.

*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

guitar289403
Returning Member

Purging belongings eBay - 1099-k and taxes

So it sounds like a schedule C along with a COGS equal to what I paid would be the best route?

martinmarks1919
Level 9

Purging belongings eBay - 1099-k and taxes

So it sounds like a schedule C along with a COGS equal to what I paid would be the best route?

It's not a business. You're selling items you held for personal use and you should rightfully get capital gains treatment. If you can't show what you paid for the items then it's not a good idea to report a COGS number equal to what you paid because you obviously can't prove what you paid. You'd be better off listing these items as capital assets....which is what they are....and reporting a zero basis provided you can show that you've held them for longer than a year. 

The case with the IRS agent discussed in another message is very different than yours. That agent sold thousands and thousands of items of clothing over several years which were advertised as new and were many different sizes. 

Opus 17
Level 15

Purging belongings eBay - 1099-k and taxes


@guitar289403 wrote:

So it sounds like a schedule C along with a COGS equal to what I paid would be the best route?


I would argue for my suggestions #1 or #2 as being the most technically correct.  You are not engaged in an ongoing trade or business, and you are selling personal tangible property for less than your cost, which, if you reported it at all, would be a schedule D non-deductible capital loss.  However, solution #1 or #2 may result in an IRS letter, for which you need to be prepared.

 

Solution #3 (schedule C) as suggested by @Critter-3 is least likely to result in IRS examination if you e-file, simply because the numbers will look ok on first pass, and the IRS is always backlogged (now more than ever).  But it is least correct under the tax code.

 

The IRS has 3 years to audit you from the date you file in most cases, and 6 years if they are going to allege deliberate fraud.  So whichever method you choose, save your backup documentation for at least 6 years. 

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