When do I need to pay tax on money received from a consignment store that was declared on a 1099-MISC?

[None2]

We cleared out years of old clothing to a consignment store and this year received a 1099-MISC. The total amount we received, and the value in Box 3, was about $2k. I can see where to declare this income, but, before I pay, I'd like to know if it is necessary or if I can specify that the income need not be taxed.

• Some posts mention that the income is taxable if and only if you received more than you paid. These items sold for significantly less than we payed for them at retail. In addition, the consignment store pays about 40% of sale price. 
• We have no way to prove the above point. We have no receipts for the original purchases, and some of these items were a decade old.

[Hal_Al]

You do not have taxable (or reportable) income.  As you said, the income is taxable if and only if you received more than you paid, for any item sold. And then, only the profit, on that item is reportable.

But, you have an IRS form (1099-Misc) to deal with.  

If you received an erroneous 1099-Misc, you have several choices:

1. Ideally, you get a corrected 1099-misc from the payer (probably not gonna happen)
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 as misc line 8z, Schedule 1 income  (enter in TurboTax at the 1099-MISC screen and identify it as sporadic income). Then enter a line 8z deduction, for the same amount.  In TurboTax (TT), enter at:
   - Federal Taxes tab
    - Wages & Income
   Scroll down to:
   -Less Common Income
         -Misc Income, 1099-A, 1099-C
          - On the next screen, choose – Other reportable income -  Answer yes to Any other Taxable Income -On the next screen, Enter the number with a minus sign (-) in front.  Briefly explain at description. Call it something "cost basis of personal items sold on 1099-Misc"
4. Do nothing and hope you can explain it away when & if the IRS contacts you

Most people, in this forum, use #3. 

[jerryseeley]

Generally box 3 income is taxable as other income.  From what you stated, the used clothing was not a business of yours.  So you would not be able to deduct anything from the box 3 amount.  It would all be taxable from what you described.

[CSKcpa56]

I would caution that if you don't report the $2,000 as income you'll receive and under reporting notice (CP 2000) from the IRS adding it to your return. You might consider filing Form 8275 with your return. On the form you can tell the IRS why you're not reporting it - which is because you sold personal property at a substantial loss.  It's a lot easier than trying to navigate letters to the IRS after the return was filed. You might even provide a listing of the items sold and their original cost to the return. 

[jerryseeley]

Your comment for #3, although correct it seems the taxpayer has no documentation of the cost basis.  I think to make a deduction for this misc. income you would need some sort of documentation to substrate your deduction.  I did not think you could just 'create' the deductible amount.  I would suggest that if he had a list of what was donated, Salvation Army (probably other organizations) has a list of items and associated suggested prices.  This would be better than no documentation.