Are you ready to uncover the nuances between personal transactions and business transactions and their differing tax consequences?
It’s important to understand the tax implications of selling personal items.
Whether you’re downsizing, decluttering your home, or trying to make some extra money through occasional sales on eBay, it’s important to know what is taxable and how much income needs to be reported.
This article, by Richard Connor at Humble Dollar, will provide a comprehensive guide for understanding the taxes associated with selling personal items to avoid any unwelcome surprises when tax time rolls around.
THIS IS MY FIFTH year providing income-tax preparation as part of the IRS’s Volunteer Income Tax Assistance program. This year, my colleagues and I have seen something new. We’ve had numerous retired taxpayers who have received IRS Form 1099-K for the sale of personal property. They’d never received one before and found it confusing.
What triggered these 1099-Ks? Many retirees find ways to supplement their income—including selling items on the Internet. This is the modern version of yard sales and flea markets.
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I remember a high-school friend’s dad, who was a talented furniture restorer. He supplemented his retirement income by acquiring old, discarded furniture. He’d refinish these items and sell them at a small profit at yard sales and other venues. At the time, it never occurred to me that his modest profit was taxable income.
The IRS considers the gain on the sale of a capital asset—broadly defined as non-financial property—as taxable. The IRS’s Tax Topic 409 explains that personal use items, such as furniture, are considered capital assets. Ditto for appliances, clothing, even baseball card collections.
Form 1099-K is used to report payment transactions handled by third-party payment processors. These processors enable small businesses to accept credit and debit card payments. Some of the better known processors are PayPal, Venmo, Square, Amazon, StubHub, Etsy and Poshmark.
The threshold for providing a 1099-K to sellers changed radically with the passage of the American Rescue Plan in 2021. Previously, sellers received a 1099-K only if they had gross receipts above $20,000 and more than 200 transactions. That threshold was supposed to drop in 2022 to sales above $600. But in late December, the IRS announced a one-year delay in implementing the change.
Whether it’s $600 or $20,000, under tax law, the gain realized on the sale of personal property is taxable. For example, if you bought concert tickets for $500 and then sold them for $1,000, you realized a $500 gain. This taxable gain is reported on Form 8949 and Schedule D.
It’s important to distinguish between “personal transactions” and “payments for goods and services.” Personal transactions include money exchanged between family and friends, including gifts. Instead, at issue here are payments for goods and services through a third-party payment network. It’s these latter transactions that are reported on Form 1099-K.
Not surprisingly, there’s plenty of confusion surrounding these forms. As with most things in the complicated world of taxes, the answer to people’s questions is “it depends.” Below are five frequently asked questions:
- How do you determine the cost basis of personal items? It depends on the item and how you acquired it. Documentation in the form of sales receipts is the best record.
- What if you inherited or were given an item? The cost basis is generally the fair market value at the time you received it.
- When does the occasional sale of a personal item become a small business? Your intent seems to matter. Occasional sales don’t constitute a business. But if you regularly engage in an activity, it may be considered a small business that requires more extensive tax reporting. The IRS provides this guide to determine whether a hobby is a business.
- How do you handle a loss on the sale of personal goods? If you sell your prized concert t-shirt, which cost you $50, for $10 on eBay, obviously you don’t have a gain. In most cases, this is not reportable income.
- What if I was downsizing and I sold off my old business suits on eBay for $750? You’ll likely get a 1099-K next year for the gross proceeds. If you know the cost of the suits and can demonstrate a loss, that’ll allow you to offset the taxable income.
The situation perhaps most likely to trigger a “surprise” 1099-K is when folks resell concert or sports tickets. StubHub sellers who reach the $600 threshold in a calendar year will be required to provide their Social Security number. In fact, “Payment will be withheld from sellers until TIN [tax identification number] information is provided,” according to the ticker reseller.
If you engage in a hobby for pleasure, without an eye toward making a profit, you can earn occasional income without worrying about it being considered a business. My brother-in-law is a talented stained-glass artist. He’s quite generous with his time and has donated some pieces to charity auctions. Admirers of his work have occasionally offered to purchase pieces.
IRS Publication 535, page 7, provides a succinct summary of how to treat not-for-profit activities like my brother-in-law’s. Should my brother-in-law sell one of his works for $75, and his materials cost $25, he would report $50 of gross income.
What if his work went viral, and it became a regular, profitable activity? In that case, he’d likely need to treat it as a small business, with all the required documentation and tax filings. For tax purposes, the key difference between a hobby and a business is the intention to make a profit.