Will the new tax law affect some gear swap folks?

[BlackHatGuy]

I’m not a tax attorney (or any kind of attorney for that matter), but this article seems to say that anyone who sells more than $600 worth of stuff on Gear Swap and is paid for goods and services thru paypal or venmo will have that amount reported to the IRS.

Anyone who knows this tax stuff, would you clarify for the community?

[Eric B]

The law regarding taxable income hasn’t changed. What has changed is that a $600 annual reporting threshold for banking services has been established.

So let’s say you sold $1000 worth of stuff on Gearswap in tax year 2022, and all the buyers paid you using Paypal. This $1000 will be reported by Paypal to the IRS. When you fill out your 2022 tax return, you need to report all your taxable income, right? That $1000 is not necessarily taxable income. Let’s look at a few scenarios.

1) Scenario 1: Let’s say that $1000 all came from selling used equipment, and you sold all of it for less than the purchase price. In that case, none of the $1000 is taxable income – you took a loss on selling used gear (like most of us do). So you don’t need to report anything on your 1040, because none of this $1000 is taxable income. But if you happen to get audited, it would be really nice to have a spreadsheet showing the original purchase prices and the sale prices for each item, so that you can easily prove that you didn’t have any taxable income as part of that $1000.

Scenario 2: You frequent yard sales and buy things to resell. Let’s imagine that you sold stuff on Gearswap for $1000, and it was all stuff that you bought at yard sales, for a total of $50. In this case, you have $950 of taxable income(1000-50) that you owe capital gains tax on, and your 1040 should reflect that. And again, it is in your best interest to have a record of the transactions that make up that $1000.

3) Scenario 3: You sell $1000 of stuff on ebay; most of it you took a loss on, but you had a Melanzana hoodie in a rare color that went for $500 more than you paid for it. Yes, this is hypothetical. :-) On your 1040, you’ll need to declare that $500 as income and pay capital gains tax on it. The other transactions where you took a loss do not count as taxable income. However – you cannot use those losses to offset the gain on the hoodie, unless you have set up a business. This is an important point. Unless you are operating a business buying and selling, you cannot use capital losses to offset your gains.

Again, this reporting requirement has not changed the taxes you should be paying. What has changed is that banking services must provide more information to the IRS. So if you have a tax liability (i.e. you made money selling stuff for more than you paid for it) you should have been reporting it on your tax return all along.

For my part, I am now maintaining a spreadsheet showing all the items I sell on forums and auction sites, showing what I paid for each item and what it sold for. And for those very few items that sold for more than I paid, I’ll be reporting the profit as taxable income on my 1040.

 

[R L]

I’m not signed up with electronic fund transfers.  Rumor has it that pay pal wants a drivers license attached ?  No school like old school for me.  Cash, check or money order.  I purged some stuff recently.  Had one inquire state that it was an inconvenience to get off the couch where they could merely push buttons on a phone to make a purchase.  wowza.  Hike your own hike.  No worries.  Just some thoughts.  Peace, ~RL

[Ray J]

Scenario 1.  A spreadsheet.  Would the IRS be satisfied with that?

The issue for a lot of this stuff is the record keeping.  I suspect few of us have records.  I actually do have a folder of receipts for camping stuff and more for receipts for expenses on my old cars.  But it will be a missing receipt to trip me up.  And I suspect many do not.  I’ve dealt with some estates lately and it’s the receipts/appraisals I didn’t have that were the issues.

[Jerry Adams]

I assume they’ll send the IRS a form 1099 with the income

I’ve had 1099 income that I didn’t report on my return.  The IRS computer may send you a letter asking for more money to pay the tax on that.

Then, you can either just pay them what they ask, or send a letter of explanation.  It takes an IRS human to deal with that letter.  They’re short on humans.  They’ve always just accepted my explanations.

Go ahead and put your transactions on a spreadsheet just in case.  Or just ignore it but be prepared to pay more tax.

[YoPrawn]

What does this accomplish exactly? Other than complicating the tax system and causing an unnecessary load on the already thin IRS? Are people selling stuff through paypal, over $600, really an issue that needs to be cracked down on? Especially when many of those sales are on used gear, which doesn’t need to be taxed when sold for a loss?

I’m getting sick of trying to figure out when laws are being passed that ultimately seem designed to punish poor people and cripple confidence in our government systems. All too often we get laws that have a thin veneer of “just doing the right thing” when they are very explicitly designed from the core to toss a wrench into the works.

[Jerry Adams]

I think people should pay tax on income.  If some of us get away without paying, then the rest of us have to pay more or take on that liability.

If paypal sends the IRS a 1099 form, it’s pretty easy to file the tax.

Okay, maybe $600 is unnecessarily small.  They ought to focus more on higher income people not paying their taxes.

The higher income people getting away with not paying their tax want us to feel aggrieved about having to pay our tiny amount of tax (relatively) so we’ll demand the IRS quits enforcing tax laws.  So those wealthy people can get away with it.

[Jerry Adams]

this is chaff isn’t it? : )

[AK Granola]

“So those wealthy people can get away with it.”

They always do. No matter how the tax laws are structured. Eat the rich.

[Eric B]

Apparently part of the reason for the new reporting requirements has to do with the “gig economy”. There are lots of people making a litlte bit of money here, and a little there, and there is concern that a lot of that is going untaxed. The old 1099 reporting threshold was $20,000 and more than 200 commercial transaction, which seems on the high side to me.

It should also be noted that it is Congress that is requiring this. Yes, the same Congress that underfunds the IRS to actually enforce the tax code is adding reporting requirements.

I seriously doubt that the IRS will come after those of us selling a few things here and there. But it’s pretty easy to keep a simple spreadsheet showing each applicable transaction. I’ve been selling a bunch of old used stuff lately, and in some cases I don’t really know exactly what I paid for it or when I bought it. But if I do get audited, I can tell the IRS what each transaction was for, and approximately what my cost basis was. I think that any auditor would accept a reasonable level of documentation.

Example: I recently sold an old 9-speed Shimano derailleur on ebay. It was brand new and had been sitting in my parts box as a spare for about ten years. I can’t remember what I paid for it, but it was retail or close to it. So my spreadsheet lists the sale price, approximate date of initial purchase, and the approximate retail price at the time. It’s just enough information to show that I didn’t make any money on the sale.

But I also sold another old derailleur for over $100 that I only paid $15 for at a swap meet many years ago. I only know that because the price sticker was still on the box. So for that item my spreadsheet includes that information, and when tax time comes I’ll owe capital gains tax on the $85 profit.

[Dan]

I have a hobby where I collect certain things, so I buy, sell, and trade frequently. In truth, I am an aficionado and not in it for the money, but the value can be fairly high. However, I rarely make much of a profit and sometimes lose money. I keep good records of my transactions, but I still suspect that this is going to be a huge pain in the neck for me because some of the sales are fairly significant. For example, I might sell something for $10k for a small loss, so I definitely don’t want to pay taxes on $10k. I have records of my original purchases, but these are just records I’ve prepared, not official records from a financial institution. I can’t necessarily provide compelling evidence of the price I paid 10 years ago on eBay, or via PayPal, wire transfer, or even cash.

Lots of questions for my accountant. Do I now need to start creating bills of sale for every transaction? I’ve tried to avoid this, but it may be preferable for me to start a business and file a Schedule C. That way losses can be used to balance gains, which is really a more realistic way to look at it.

[Ben H.]

Creating a business (just filling in schedule c self-employment) to report these kinds of transactions is pretty simple to do with tax software. When individuals get audited they often get asked if they have a hobby from which they are deriving income. Documenting gains and losses yearly on your taxes is a good way of establishing your willingness to properly report and pay what you owe. It also lets you wipe out gains from losses. Good documentation is golden, but I doubt they are going to give you much grief over $1000. If you are writing off $100,000 you better make sure you have good documentation for that.

[HkNewman]

Are people selling stuff through paypal, over $600, really an issue that needs to be cracked down on? Especially when many of those sales are on used gear

Read the idea is the IRS cracking down on business like entities (groups, individuals) using online sales to hide profits.  Not a tax attorney but profit is what the IRS is after in looking at business activity vs a hobby.

Kind of like a “yard sale” or “garage sale” really isn’t a business vs cleaning out unwanted items almost always at a loss.

Almost all used gear is sold at a loss, so it wouldn’t qualify as a business.  In fact if the IRS pressed it, many should claim a loss.  As written above, a spreadsheet could be in order for American gear swap sellers.  It is a bit confusing though, so think the law should have specified repeated  “profits” (i.e. selling at a higher price than the item costs).

[Author]

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