Casual eBay Seller Getting Ready for Tax Year 2022 1099-K

[stevendingle54]

Most people seem to get this a bit mixed-up....

If you sell  $600 on Ebay, you will get a 1099.

If you are not a business (like most casual sellers), then you must report this as hobby income.

Since the TJCA was passed, one cannot deduct any of the costs associated with the hobby...ergo, not "cost basis"...the entire sale is added into your AGI.

Of, there are issues such as safe harbor, etc, which the casual user aren't going to bother with.

The end result: if you sell just your good china on Ebay  for $1200, you will owe tax on the entire amount.

Depending on one's outlook, you could see this as just fair...after all, the increased personal deduction under the TJCA is supposed to "cover" that. On the other hand, you could see this as government casting too wide of a net and unfairly penalizing small folks by paying tax on the china twice....once, when you paid tax on your income when you bought, and again when you sell it...

[Opus 17]

@stevendingle54 

Just no.  You don’t have taxable income on the sale of personal property unless you sell the property for more than your cost basis. This applies to garage sales where you sell for cash just as well as to eBay.   It doesn’t become taxable income just because the payment processor sends a 1099.  

You can’t deduct selling expenses, whether it is online transaction fees or the cost of renting a table for your garage sale. But your taxable income is your gain, not your gross proceeds.

The issue is how to report it on your tax return, and what kind of records you need to keep in case of audit. The rules about when payment processors must issue a 1099 do not change the fundamental definition of taxable income.

There is no need to confuse things any further.  

[ThomasM125]

The discussion seems to center around the issue of what is considered income. Is it gross receipts, or gross receipts less the cost of the items sold? IRS publication 17 discusses hobby income on page 73, but does not define it, only to say that you can't deduct expenses related to a hobby activity, unless you report them on schedule A, which is not allowed for most filers in 2021. As a practical matter, if you report less than the amount reported to you on form 1099-K, you may receive a notice from the IRS somewhere down the road assessing additional tax for income you did not report.  

Publication 17 Your Federal Income Tax

[Critter-3]

If you get a 1099-K for $600 or more and the income is not reported on the return somewhere then you will 100% get an IRS audit letter in the future where they will contend this is all SE income where you owe SE taxes on top of the federal taxes. 

So until the IRS give some kind of guidance  on this matter all we can do is wait. 

[stevendingle54]

Please provide a reference to your position on this...I would like to be corrected.

Everything I have studied on this from post-TJCA legislation agrees...deductions for "hobby income", which could be the selling of personal possessions, were removed and all proceeds are to be reported as income.

If a 1099k is issued, and one gets audited, I suppose you would be fine explaining that it was a one off sale.

[Opus 17]

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@ThomasM125 wrote:

The discussion seems to center around the issue of what is considered income. Is it gross receipts, or gross receipts less the cost of the items sold? IRS publication 17 discusses hobby income on page 73, but does not define it, only to say that you can't deduct expenses related to a hobby activity, unless you report them on schedule A, which is not allowed for most filers in 2021. As a practical matter, if you report less than the amount reported to you on form 1099-K, you may receive a notice from the IRS somewhere down the road assessing additional tax for income you did not report.  

Publication 17 Your Federal Income Tax

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No one is disagreeing with the need to include some kind of report.  The original question was how to report it (which we dealt with for 2021, and must wait and see for 2022), but there also seems to be a question of what exactly is taxable.

IRS publication 525 says:

Sale of personal items. If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it as explained in the Instructions for Schedule D (Form 1040). You can't deduct a loss.

Pub 525 also says:

If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain. However, if you sell items from your collection at a loss,

you can't deduct the loss.

Ergo, the sale of personal items for more than your cost basis is a capital gain.  You can't deduct selling expenses, but there is no rationale for claiming that the entire proceeds are taxable, even if you get a 1099.  The trick is to prove it to the IRS.  

There's also a Tax Court case I'm not going to bother looking up, involving someone with $20,000 of eBay sales who said it all came from personal items sold for less than the cost basis.  The court agreed on principle that items sold at a loss would not be taxable income, but this specific taxpayer had no records to actually prove they were selling pre-owned personal items at a loss, so all the proceeds were determined to be taxable.  Not because sales proceeds=income, but because bad record keeping=you're SOL.   (The court also noted that since the taxpayer was an IRS agent, they had more reason than most to know better.)

[Opus 17]

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@Critter-3 wrote:

If you get a 1099-K for $600 or more and the income is not reported on the return somewhere then you will 100% get an IRS audit letter in the future where they will contend this is all SE income where you owe SE taxes on top of the federal taxes. 

So until the IRS give some kind of guidance  on this matter all we can do is wait. 

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No one is disagreeing with the need to include some kind of report.  The original question was how to report it (which we dealt with for 2021, and must wait and see for 2022), but there also seems to be a suggestion that the entire proceeds are taxable.

It's not.  

[Opus 17]

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@stevendingle54 wrote:

Please provide a reference to your position on this...I would like to be corrected.

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Publication 525.  Capital gains from sale of personal property.  Page 35, example 39,

https://www.irs.gov/pub/irs-pdf/p525.pdf

You can't deduct expenses (shipping, advertising, etc.) but basis is not an expense.  

[Opus 17]

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@stevendingle54 wrote:

Please provide a reference to your position on this...I would like to be corrected.

OK, I looked it up. 

https://www.forbes.com/2010/04/22/irs-tax-audit-ebay-seller-personal-finance-irs-worker-loses.html?s...

In his decision, Judge Dean noted that taxpayers are obligated to report any gains from property sales, which means Orellana was obligated to track her cost or basis of the property sold, to show whether she'd had such gains. Generally, sellers of personal items on eBay get less for their items than they paid for them. But Orellana, representing herself in court, said she had no receipts for items sold. (emphasis added)

https://taxprof.typepad.com/taxprof_blog/2010/04/tax-court-irs-agent.html

For 2004 the RA determined that there were unidentified bank deposits of $8,402.48 and unreported adjusted gross receipts from eBay/PayPal of $22,260.65 for a total of $30,663.13 of unreported income. There was no reduction in gross receipts to account for petitioner's basis, if any, because there was no evidence with which to tie petitioner's purchases to her sales (emphasis added). 

Go to this page, select the tab for "opinions" and search for the plaintiffs name "Orellana"

https://dawson.ustaxcourt.gov

Here's some Treasury regulations

https://www.law.cornell.edu/cfr/text/26/1.61-6

(a) In general. Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged.

[Opus 17]

As a final comment, it's worth thinking about that a "hobby" of selling tangible personal property will look very different on a tax return than almost any other hobby.  If you were an amateur photographer and sold photos, you could consider the frames as tangible property that has a cost basis, but the travel, printing, advertising, and everything else would be non-deductible expenses.  If your hobby was performing as Santa Claus at holiday parties, then none of your expenses would be deductible.  If your hobby is metal detecting, everything you find is taxable income and you can't deduct travel or any other expenses.

Because we are talking here about the sale of tangible personal property, you follow the rules for capital gains property, and your gain is proceeds minus cost (if you can prove it). 

[premmer]

Thank you to all for the wealth of information provided. I will research the issue next fall. If Congress fails to provide an option to report cost of goods/sales for my tax filing status and $1440 in annual sales, I’ll just pay the additional taxes rather than risk an audit to save <$150.  

[Hal_Al]

@premmer  said "I sold six orders of a health-related product and that is the end of my eBay selling venture" 

That sounds like you were briefly (very briefly) in business and should file Schedule C.

However "All this to save $114" sounds like you just overbought something and now need to get rid of the excess.  That falls into the "garage sale" category. You report the difference between what you paid for them and what you sold them for, as income.   You don't get to deduct any of your expenses.

Don't get hung up on the fact that you are reporting income that is less than the amount on the 1099-K.  That's just the way it is.  The IRS doesn't yet  have a reporting mechanism, for the details, in this situation.  

Some people recommend using a workaround to report it (I wouldn't). It would work like this: 

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

-Less Common Income

      -Misc Income, 1099-A, 1099-C

       - On the next screen, choose – Other reportable income  

       - On the next screen, click yes

       - On the next screen, you'll get blanks to enter the amount and a description. It will go on line 8 of Schedule 1 as "Other Income".  Suggestion for description: eBay sales on 1099K

When that's done, do it again (a 2nd entry).  This time make it a negative entry; put a minus sign (-) in front of the amount. Suggestion for description: cost basis of eBay sales items.

Both entries will go on line 8z of Schedule 1.  It appears the 2021 TurboTax interview does not (yet) have an entry  for line 8i  of Schedule 1 (Activity not engaged in for profit income)

Reply Edit (2 hours later):  To get to the entry on line 8i of Schedule 1, you must enter the income as Hobby Income. But you must enter the adjusted income (1099-K amount less cost of goods sold [cost basis]).  TurboTax will ask you to enter expenses, but it does nothing with the expense amount, since it is no longer deductible .

[premmer]

Thanks for your input.

My 2022 (6) transaction eBay sales amounted to $1440 which I believe will be reported next year on an eBay-issued 1099K.  My total cost of goods, sales fees, shipping charges, packaging and misc. expenditures amounted to $519 leaving a profit of $921 which is taxable.  Given the fact that I’m retired, fixed income, I have estimated my standard deduction federal taxes for 2022. Taxes on $1440 would amount to $316. Taxes on $921 would amount to $202 or $114 less.  If Congress does nothing, which they excel at, do I want to risk an audit over pocket change, I think not.

I did make the (2) entries you suggested and they posted the reduced amount of $921 on 1040SR Line 8. It would be great if I could post an adjustment of $519 that would post on Line10.  Do you believe the IRS would accept the -$519 income without question?  

[Hal_Al]

Q. Do you believe the IRS would accept the -$519 income without question?  

A. Yes. Yours is a common situation.  And your income is low enough not to attract attention.

That said, $519 is not the correct number to deduct.  In your "not for profit" activity, you may only deduct cost of goods, not expenses (sales fees, shipping charges, packaging and misc.).

That said , it sounds like you were in this to make a profit.  As such, it should be reported as self employment. This means you will pay about 14% self employment (social security and medicare) tax, in addition to income tax.  But you'll also be allowed the 20% Qualified Business Income (QBI) deduction. 

[FlaSteve]

Hi, I hope my query about this subject will be easier to answer.

I will receive my 1st ever 1099k for this year 2022. I had to give ebay my ssn.  I never have ever gotten close in my sales to the 20k threshold prior. 

I have no need any of the deductions or expenses many  have asked about, or the distinction between "hobby or business". I simply just want the answer about where to put the income as it appears on the 1099k, on next years 1040SR I intend to pay taxes on the entire amount, much like my pension, which is 100% taxable. Schedule C is a bit overboard, I don't need to make any adjustments, deductions, expenses, losses etc. on the figure that will be on the 1099k. I am considering all to be profit and will therefore need to be reported on my 1040SR.

Thanks,

Steve