The Hidden Tax Implications of Selling Your Stuff Online
Selling old stuff online is starting to create more confusion for taxpayers — even if you simply sold something through an online marketplace and exchanged the cash on payment processing app.
If you sold your old grill, a bike or a number of items on Facebook Marketplace, eBay or another online forum and accepted payments through apps such as PayPal, Cash App and Venmo, you need to be ready to receive 1099-K forms from the IRS.
Not only do you need to pay attention to the forms, but also you need to be aware that you’re on the hook to ensure that any incorrect forms you receive are fixed. Otherwise, you could end up expected to taxes you don’t even actually owe.
You might be wondering what all these new forms are about and why you might need to pay taxes when you sell your old stuff. What you might not realize is that in some situations, depending on the circumstances, selling something — even your old computer or furniture — always had the potential to be a taxable transaction. (Keep reading for more details on when you have to pay taxes on a sale like that below.)
What Are These New 1099-K Forms All About?
The surge in 1099-K forms is due to a law passed by Congress that now requires apps like Venmo, PayPal and Cash App and online marketplaces like eBay to report a whole lot more transactions than ever before.
Previously, these apps were not required to send you a 1099-K unless you were involve in more than $20,000 worth of transactions for goods and services and more than 200 business transactions in one year.
Needless to say, those are some big numbers and only affected people who ran businesses.
But, for 2023, the 200-transaction limit has been removed, and the dollar value has been reduced, all the way down to $600.
What Does This Change Mean for Individual Taxpayers Who Sold Personal Items?
For starters, more tax forms inevitably equal more confusion. Of course, the fact that the IRS is tracking many more transactions also means that more taxpayers will receive audit letters as a result of underreported income, known as IRS Letter CP2000 letters.
As more of these audit letters hit mailboxes, you might need help from a tax lawyer who knows the ins and outs of 1099-K forms and IRS audits. If you received a 1099-K with a big transaction you think is incorrect, contact an experienced tax attorney now.
More 1099-K forms also means making sure the forms you receive are accurate and knowing what to report on your tax return. The problem is you might receive a 1099-K for payments received, even when you don’t have to pay taxes on them.
Does an Individual Have to Pay More Taxes Because of the 1099-K Forms for the Sale of Personal Items?
The short answer is “maybe.” Whether you have to pay taxes after selling a personal item depends on the situation.
If you lost money on the sale of an item, you don’t have to pay taxes on it. You also should keep in mind that the loss in this case is not deductible.
The confusion lies in the fact that you might still receive a 1099-K form showing how much you money received in the sale of the item through an app or online marketplace.
The challenge is that it is your job, as the taxpayer, to be able to show the original price you paid for the item in order to demonstrate that you don’t owe taxes on the sale. But most people selling old stuff will have a hard time proving what they originally paid for something they bought a long time ago.
If you made money on the sale of your old bike or piano, you must pay taxes on the gain. And believe it or not, that’s not a new rule.
What’s new is that it’s now going to be harder than ever to hide it, due to the increased reporting on 1099-K forms through payment processing apps.
If I Sold a Personal Item and Lost Money on the Sale, What Do I Do?
While there are forms to use to report the sale of personal items at a loss, if the sale isn’t taxable, you generally are not required to report it on your tax return.
It’s still a good idea to keep a record of it in case the IRS sends you a letter asking for documentation of the loss.
If I Sold a Personal Item and Made Money on the Sale, How Do I Report It?
If you made money on the sale of one or more personal items, the transaction is taxable.
In such a situation, you should report it on the following two forms:
What if You Paid Back Your Friend for Dinner or Bills, Or Received Birthday Money from Your Parents? Will You Receive a 1099-K?
It’s common to use payment processing apps to pay your share of bills to your roommate or pay back a friend for dinner.
For reimbursements like that, taxpayers are not supposed to get 1099-K forms. However, it’s important to be attentive because you might receive a form if the payment was inaccurately labeled as a business transaction or a sale of goods.
What If You Get a Form 1099-K In Error or the Form You Received Is Incorrect?
You may get a Form 1099-K in error if it reports payments that were gifts or reimbursements from friends or family, or if the form doesn’t belong to you.
If you think it’s in error, or if the 1099-K belongs to you but includes inaccurate information, you should request a correction from whatever app or marketplace issued the 1099-K.
If are not able to obtain a corrected Form 1099-K, report the amount on Schedule 1 (Form 1040), Additional Income and Adjustments to Income in two places:
- Part I – Line 8z – Other income. You can simply write: “Form 1099-K received in error” and the amount.
- Part II – Line 24z – Other adjustments: Enter as follows: “Form 1099-K received in error” and the amount.
Can I Do Anything to Make Dealing with This Change Easier?
No taxpayer wants to deal with more tax forms, especially for things they’re selling to declutter or make a little cash. But the 1099-K forms are coming to you if they haven’t already and it’s important to be prepared.
For the sale of personal items, the best thing you can do is keep a list of all transactions you make, even small ones. It doesn’t take long to add up to $600 in a tax year.
When you’re selling your old stuff, keep a log of each item, how much you sold it for, and how much you paid for it originally. If you made money on a sale, remember that you have to look out for 1099-K forms and be ready to pay taxes on it.
If you can’t make heads or tails of an IRS audit letter for underreported income or 1099-K forms with large dollar values that don’t seem accurate, talk to an experienced tax lawyer now.