Agreed. The federal income tax law is complex and often confusing, but you cannot simply use your own judgement as to what to report and how to report it.
As far as model railroaders are concerned, think about it. When was the last time you sold a used piece of equipment at a profit? To answer that question for myself, never. The used items that I sell on eBay are always in very good condition, but I usually sell this stuff for 50% to 70% of what I paid for it. Those losses are simply not deductible. But, if I were to manage to sell an item at a profit, it would be subject to tax, subject to de minimus rules imposed by the tax law.
The federal income tax law regarding sales at a profit are primarily aimed at the “big guys” who sell new stuff, almost always at a profit. But the IRS casts a big net to snare all of the profit makers and, as in this case, the little guys get caught in the same net.
In the case of the legislation that provoked this thread, the little guys most affected are those folks who buy and sell “collectibles” and those folks who make and sell stuff like pottery, jewelry, art work, etc.
Let me add one final thought. If you don’t keep receipts for your purchases, at least keep a spreadsheet of purchases and costs. I do both although I doubt that I will ever be required to produce this stuff for some IRS agent to review.
Just on a quick once-over of the info at the IRS website, it sounds to me they’re trying to find people who are using ebay or other online sellers to basically run a business selling things, as opposed to people who just sell their personal stuff once in a while.
We ran into something like that here in my state regarding collecting sales tax. If you sold your personal property at an “occasional” (4 or less a year) garage sale or flea market, you didn’t charge sales tax. Some folks were having a weekly “garage sale” where they were selling things like new TV sets and microwaves. You also had hobby shops (sometimes from out of state) coming to model railroad flea markets and selling products they normally sold in their store, but not charging sales tax. Eventually the state cracked down and required people selling things as a business to charge sales tax at flea markets etc., but still allowing regular folks to do occassional sales of their own property without worrying about it.
That’s why I have sympathy for the guy that sold a pair of locomotives for $650, but none for the guy doing $10k at a show. There’s a point where it is a business, regardless of the number.
I do keep a spreadsheet of my sales, listing cost, shipping, and ebay fees. I very rarely made a profit on any one sale. Any sale that went over retail price, I rebated shipping charges back and put extra stuff in the box.
Bottom line as I see it is if you bought a brass engine 10 years ago and sell it now, the IRS doesn’t really care. You bought it, probably paid sales tax on it. If you sell it now for more or less, not a problem. I suspect it’s people who buy and sell things as a business but who are trying to disguise it as just an individual selling their own items that is the concern.
It’s a little like the problem Walthers ran into a while back where guys would register as ‘vendors’ so they could buy things for their own use (or their friends) but only pay wholesale instead of retail. Eventually Walthers set up requirements that you had to have some sort of actual business (a brick-and-mortar store, or verifiable on-line dealer) to be allowed to buy wholesale.
A lot of people use their dealer licenses from other businesses, like auto sales, to buy model trains at wholesale–without a storefront–and they get away with it for awhile perhaps many years. If you bought enough stuff, some importers did not care that you had no storefront, and this included but was not by any means limited to Overland Models. Sometimes you don’t really know who your model railroad “friends” really are when you only see them in the train store (I waited on them) and in the train room or at train shows. One of mine, now deceased, was caught turning back odometers on used cars–80 counts–and he went to jail. He also had been a big buyer of HO brass, with an extensive inventory of all the small screws, springs, whatever from Overland Models. He could and did completely remotor and regear brass diesel engines with all new Overland tower gear mechanism parts.
I have heard other dealers openly bragging at a train show that the tax they collect is extra profit because they never report it.
So yes, I kinda think I understand the intent of the law. I’m just done selling on ebay. Some of the customers became too much of a hassle to deal with. The used stuff my local store is liquidating on my behalf–well I’ll never have that much stuff again.
I notice the IRS website’s info page on the 1099-K seems to emphasize “business”…
What should I do with this information?
It is important that your business books and records reflect your business income, including any amounts that may be reported on Form 1099-K. You must report on your income tax return all income you receive from your business. In most cases, your business income will be in the form of cash, checks, and debit/credit card payments. Business income is generally referred to as gross receipts on income tax returns. Therefore, you should consider the amounts shown on Form 1099-K, along with all other amounts received, when calculating gross receipts for your income tax return.
I notice the IRS website’s info page on the 1099-K seems to emphasize “business”…
What should I do with this information?
It is important that your business books and records reflect your business income, including any amounts that may be reported on Form 1099-K. You must report on your income tax return all income you receive from your business. In most cases, your business income will be in the form of cash, checks, and debit/credit card payments. Business income is generally referred to as gross receipts on income tax returns. Therefore, you should consider the amounts shown on Form 1099-K, along with all other amounts received, when calculating gross receipts for your income tax return.
Per the IRS website, if you receive a 1099-K and you operate a business buying and selling things using PayPal, Ebay, or other third-party electronic paying systems, you will use that information when completing the return for your business income.
Note that the 1099-K has a section (box 2) for the “Merchant category code”, where it lists the code for the type of business you are operating.
The “understanding your form 1099-K” also explains that if you receive a 1099-K “in your name as an individual (showing your social security number)” that you should contact the issuer of the 1099-K to correct it to show your business ID number.
In fact, everything the IRS has that I can see re the 1099-K is talking about business income issues.
Buisnesses like e-bay cover their butts so if there is any chance something is required, they will send the paperwork. It is the tax reason to do things like the liabity reason for all California buisnesses having prop 65 warnings at their entrances.
I don’t believe that CYA is the reason that eBay will send out 1099-Ks to individual sellers. It is the law, so eBay must send out those Forms to affected sellers. eBay has no say in the matter.
That’s how I read it. The payments companies are required to send the 1099-k to all payees. It doesn’t distinguish if the payee is an individual or a business.
It seems like the INTENT of the law is to apply it to only businesses since they typically sell items at a profit, so there is tax due. For an oindividual, exactly how much margin or income is there when an individual receives $601 for items sold? The tax due is miniscual and is dwarfed by the amount of events where the paperwork would show no taxes owed at all.
Sounds like the Recovery Act of 2021 was hastily written to where the words do not mirror the intent. I would expect it to get corrected at some point. Lets hope some time this year.
The company filling out the 1099-K has to fill box 2, the four-digit Merchant Category Code saying what kind of business is getting the 1099. MCCs are only assigned to retail / service companies.
This is from Turbotax’ website under “small business taxes”:
Purpose of the 1099-K
IRS Form 1099-K came into existence as part of the 2008 Housing Assistance Tax Act—even though it has nothing to do with housing. This form endeavors to ensure that all online retailers are reporting sales for tax purposes. It requires credit card companies, such as MasterCard and Visa, and third-party processors, such as PayPal and Amazon, to report the payment transactions they process on behalf of retailers. Therefore, if you accept credit card payments online, you may end up with a 1099-K at the end of the year that summarizes all of your sales transactions with each processor.
That link in the above reply is for Tax Year 2021. “In limited instances: If the sales volume is over $600 per year” is a reference to a few states whose state law covered sales volume under $600 in 2021.
In 2022, eBay is required by the IRS to issue a Form 1099-K for all sellers who receive $600 or more in sales.
We’ll have to see I guess. It may be Ebay doesn’t completely understand this change yet. It is a bit fuzzy. [:^)]
But a couple of things to remember:
The IRS can’t create or change tax law. As far as I know, what is considered a taxable sale and what isn’t hasn’t changed. Normally, as I understand it, if you buy something retail, pay appropriate sales tax or excise tax etc., and later sell what you bought, it’s not a taxable sale. The problem is when you buy something wholesale (as a retailer, paying no sales tax) and then sell it for more than you paid for it and don’t collect sales tax or report it as income.
The 1099-K is a business form, not an individual form. From everything I can see, the IRS says it’s issued by third party payers to retailers who receive payments over a certain amount during the year through that payer. What’s changing is the IRS is using their regulatory power to reduce the amount required for a 1099-K to be issued.
Whether or not you get a 1099 doesn’t determine whether income is taxable. If you have a bank account and the bank pays you interest, that’s taxable income on your 1040. The bank isn’t required to send you (and the IRS) a 1099-INT showing how much they paid you until it hits a certain level (I think $400). But interest income is taxable whether it’s more than $400 or less than $400. Similarly, the treshhold changing for 1099-Ks to be sent out doesn’t change whether the income from the sale is taxable or not.
There is no confusion about what has been asserted. Nothing about tax law has changed. The elimination of paper and coin and switch to digitial payments means that previously uncollected taxes will now start to be collected. The IRS made the reporting threshold at $600 to require the digital payments services middlemen to help collect the taxes owed. No more stuffing dollar bills in a shoebox.
Feel free to check Etsy and Venmo’s site info. They also understand the new law to say that ANYONE who receives more than $600 in payments…by law…will receive a 1099-k. Its up to the recipient to figure out if they owe taxes on the 1099-k amount (which will include proceeds that are subject to tax or not subject to tax)
Apparently, the law does not require payment services companies to figure out of the payee is an individual or a business. Both can owe taxes anyway.
Apparently, the IRS is assuming that if you receive sale proceeds more than $600 in any one year you are not having a garage sale of household items being sold for cents on the dollar, they are assuming you have a business even if you are not designating it as a business. So everyone over the threshold gets the business form 1099-k
All of them would like to see the threshold raised.
Well stated. If a model railroader is going to sell items on eBay and the total sales in 2022 exceed $600, the model railroader is gonna get a 1099-K. Grin and bear it.
The chances are extraordinarily high that there will not be any taxes due from these sales since the vast majority of such sales, almost always used items, were made at a loss. The rare exception may be an auction where two determined bidders will pay any cost to win the auction, for whatever the reason.
Just saw an article that the IRS just trashed over 5 million W-2s and 1099s because they didn’t have the ability to match them up with the return. This was especially true if the return was not electronically filed. Apparently if you do a hand-written return, the IRS has to do the matching by hand. Which is why the IRS is trying to mandate ALL businesses file electronically.
That may be the real issue here - payment companies don’t have the resources to figure out who is a business and who isn’t, so will just send the 1099-K to everyone and let them figure it out. Remember the 1099-K is a business tax form.
Exactly. A transaction that was taxable in the past is still taxable. If it wasn’t, it still isn’t. Getting a 1099 doesn’t make it taxable; not getting one doesn’t make it not taxable. Many people get 1099s for income (like Social Security) that ends up not being taxable on their 1040.
Profit or loss only is a factor for businesses. If you bought something retail, it’s yours to give away or sell as you wish. It’s not the same as a business that buys and sells to make money.