Dear Tax Guy,
I am retired with Social Security and a state pension. Over the last 30 years I’ve accumulated a lot of “junk” from eBay EBAY, +0.09%. Now, I’m also trying to clean out my house, and sell it at cost or a small profit.
With eBay now sending out 1099s, I believe I have to pay taxes on the profits.
Is it possible to use the income figure on the 1099, say $6,000, and contribute this amount to an IRA rather than claim the small profit and pay taxes? Of course, I’d be coming up with the $6,000 to deposit in the IRA and getting the tax deferral.
Determined to declutter
All you want to do is clean out your house and make a tax-efficient move with your cash.
All I want to do is give you a clean answer. But I can’t.
Your question is touching a hot-button topic and an open question about what tax forms and tax obligations small businesses and potentially many regular people will face during the approaching tax season.
In its stacks of documents, the Internal Revenue Service has the Form 1099-K. This is a form that payment platforms generate when a payment recipient makes a certain amount of money. (In this case, you are the recipient once you are compensated for the stuff you’ve sold. Meanwhile, eBay is the platform that would send the form to you and the IRS.)
In the old rules, the third-party payment platforms would churn out a 1099-K once the combined payments exceeded $20,000 and there were more than 200 transactions.
In the American Rescue Plan of 2021 — the same sweeping bill that authorized the third round of stimulus checks and temporarily boosted child tax credit payments — lawmakers made the reporting thresholds kick in much sooner.
“‘If you sell personal property at a loss — like pocketing $100 on eBay for a bike you originally purchased at $200 — the tax code’s capital loss provisions do not apply.’”
Starting this year, it only takes $600 in payments before these third-party platforms need to send along a 1099-K. That can happen with just one transaction. Assuming these reporting rules remain, you’ll likely receive a 1099-K, given your estimated $6,000 in sales.
A coalition of businesses and online marketplaces — including eBay, PayPal PYPL, -4.93% and Etsy ETSY, +0.79% — wants Congress to pass a law before the end of the year that pushes the 1099-K reporting threshold higher.
Among its complaints, the coalition says the low threshold will cause too much confusion for people who may not have tax liability. If you sell personal property at a loss — like pocketing $100 on eBay for a bike you originally purchased at $200 — the tax code’s capital loss provisions do not apply.
So keep watching Capitol Hill to see what happens next during a busy lame-duck session.
“eBay has been working diligently on behalf of its sellers to change the new 1099-K reporting threshold from the unreasonably low level of $600,” an eBay spokesman told me. “While we hope Congress will act on this important issue, we are also helping our sellers prepare for any outcome,” the spokesman said, pointing to online resources the company developed on what sellers should know about 1099-Ks.
Forget politics, let’s talk taxes
Regardless of what dollar amount triggers a tax form, if you turn a profit on the sale of personal property you have a capital gain the IRS would want to tax. The gain is the difference between what you paid for the asset (the “cost basis”) and what you sold it for.
“If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, etc., at a gain, your gain is taxable as a capital gain,” the IRS said in a series of frequently asked questions on the revamped 1099-K. “If you have a loss on the sale of an item you owned for personal use, do not report a loss (the loss is not deductible),” the agency noted.
You may be making money when you sell your stuff, and I hope you do. One person’s “junk” is another person’s treasure. But the cash you are getting is not necessarily a capital gain for tax purposes.
First, you will need to know what you originally paid in order to determine the cost basis for the capital gain. If you have the receipts on the accumulated junk, I applaud your fastidious record-keeping. Remember, selling stocks, bonds and other investments at a loss activates the tax code’s capital loss provisions, but selling personal property does not enable losses.
“Personal losses are normally not tax-reported events, but this 1099-K threshold makes that impossible,” said Ryan Ellis, an enrolled agent. Ellis is also president of the conservative-leaning non-profit, the Center for a Free Economy. He wants a return to the pre-existing threshold to avoid the “mess” he says your scenario highlights.
Ellis said he worries that if taxpayers don’t report such transactions on online sales on their income taxes, they will receive an IRS letter asking for an explanation.
The IRS itself says it will match 1099-K data to tax returns. The 1099-K data “will be used for systemic computer matching to tax returns to identify potential unreported income,” the IRS said.
For his own clients, Ellis said he may put the 1099-K amount in a catch-all line on the 1040 for unspecified income and also in a catch-all line for deductions. “Then, honestly, I’m hoping for the best,” he said.
You ask, “How do I report Form 1099-K on my tax return?” The IRS writes, “Information on your Form 1099-K may be used to compute your gross receipts or sales. You should follow the return instructions on the form you are completing to report your gross receipts or sales.”
Is the juice worth the squeeze?
Remember my apologies about my inability to offer a clean, simple answer? It’s about to get even more complicated.
You’re thinking about putting the proceeds in an IRA. Here’s the catch: You contribute to an IRA with earned income like “wages, salaries, commissions, tips, bonuses, or net income from self-employment,” as the IRS notes.
To generate earned income destined for an IRA, Ed Ryan, an enrolled agent and founder of Ryan Financial in Rutherford, N.J., said, “You have to say you’re in the business of selling junk.”
But if you’re self-employed, you’re also going to have to pay self-employment income tax too, Ryan noted. For a retiree who wants to declutter at cost, Ryan said that might not be the best route. “The juice is not worth the squeeze,” he said.
If you want stock market exposure and tax advantages, put the eBay proceeds into a brokerage account.
If the market rebounds in 2023, you can sell and lock in profits after one year. That gets you long-term capital gains rates. (It’s 15% for most households. It’s 0% for single filers with up to $41,675 and up to $83,350 for married couples filing jointly this year).
If the bear market stays for 2023, you have capital loss provisions to finally fall back on. You can offset other capital gains with these losses. If losses exceed gains, the IRS will let you shave up to $3,000 from your income and carry forward the remaining loss.
If these tax questions feel new to you, remember you are not alone. As Ryan put it, “How many client are selling a couple things on eBay? I’m going find out this tax season.”
Got a tax question? Write me at: firstname.lastname@example.org
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.