There are no limits or exemptions to paying income tax. You must report and pay tax on all of your taxable income.
I don’t know why the IRS set the limits that they did on 1099-K forms. This is a relatively new form that was created after the rise of third-party payment processors. Presumably, someone who receives a lot of third-party payments is of interest to the IRS because the payments could be taxable income. However, not all third-party payments are taxable income. You could receive a 1099K as a result of a go fund me campaign in which all of the money is non-taxable gifts. You could also receive a 1099K as part of a go fund me campaign where you promise to do something of value in return for the money, such as make a new product or service, in which case it is taxable income. Simply receiving third-party payments or getting a 1099K does not make it taxable income. What makes it taxable income is what you did to get the money.
Now in the case of eBay or garage sales, if you are only selling used items, you will usually not have taxable income. That is because the sale of personal property is considered a capital gain or loss depending on whether you sold the item for more or less than you paid for it. If you buy a fancy dress for $100 and later sell it for $20, you have a capital loss. If you buy a comic book for 10 cents and later sell it for $100 you have a capital gain. When buying and selling personal items, you cannot deduct capital losses from your income but you must pay tax on your capital gains. (The amount you paid for an item is called its cost basis, and if you sell for more than the cost basis, you have a gain; if you sell for less than the cost basis, you have a loss. There can sometimes be adjustments to cost basis, and cost basis is different if you receive an item as a gift or inheritance, but counting the purchase price as the cost basis is the simple case for most items.)
Now, if you are only selling used personal items, you will probably always be selling for less than you paid (less than the cost basis) so you don’t have taxable income. If you don’t have taxable income, you aren’t required to report it.
But, because of the requirement for third-party payment processors to issue 1099K forms, you may be required to report your eBay business on your tax return even if it is only to declare that you made no profit and had no taxable income, just so that the IRS has documentation of that fact to go against the 1099K. In order to do this, you will need to have some kind of written record of what you bought and sold so that you can demonstrate to the IRS, if audited, that the sales proceeds were less than your cost basis. The tax court case I mentioned involved someone who claimed that they were only selling used items. I think the court was skeptical of this claim because of the dollar amount involved, but regardless of the court’s skepticism, the taxpayer is required to maintain these records and have them available if audited. Because the taxpayer did not have the records proving the cost basis of the items, the IRS ruled that the entire amount was taxable.
if you had a garage sale where you sold used personal items that originally cost you $10,000 in total, and you received $2000; and at the same garage sale you bought lemons and sugar for one dollar and sold cups of lemonade totaling $10; then technically, you have an $8000 capital loss on your personal belongings which is not deductible and you have nine dollars of taxable income from selling the lemonade. The IRS is busy enough to not worry about this kind of thing and most of the time they’re smart enough to not worry about it. But once you go on eBay and trigger a 1099K, you are going to have to report that on your tax return and you are going to need to have records.
The bottom line is that if you are only selling used items for less than your cost basis, the proceeds are never taxable income even if you get a 1099K. But if you get a 1099K, you will have to report the business on your tax return which means you will have to have records showing that you did indeed sell the items for less than their cost. On the other hand, if you are selling items for profit (for more than you paid, whether these are personal items or some other wholesale business you’ve established), then you are required to report your income and pay taxes even if you don’t get a 1099K.
