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.
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:
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.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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Rick,
I’m not sure this “…capital asset—broadly defined as non-financial property…” is correct the way it’s worded.
Tax topic 409 literally says “Almost everything you own and use for personal or investment purposes is a capital asset.”
Perhaps you meant something like, ‘in addition to financial assets’, since most would know that investments are capital assets, with gains/losses reported on Schedule D and Form 8949.
Another justification for 87,000 additional IRS agents – all that unreported yard sale and flea market income, and the underground economy about to be outted by digital currency.
Nice article. I’ve read quite a bit about how PayPal, et. al may be generating 1099’s for partakers. Since it may effect me, I’m very interested. Unfortunately the guidance they provide is vague. I would love to hear about personal experiences of those affected. Maybe you are precluded by confidentiality rules, but I’d be very interested in specific examples.
Ebay used to be a fun way to purge excess household items and RECOUP a few bucks. But the year I received a 1099k, it was like enduring a cold shower.
To the accounting: most would add a Schedule C to their Form 1040, if running the endeavor as a business and not a hobby. Ebay and Paypal have detailed activity reports you can run
Remember to list the selling and postage fees as expenses!
Good morning Rick,
I would fine tune your bullet point regarding the basis of inherited or gifts received.
IRS Pub 551 tries to help clarify the many ifs and buts of the tax code related to basis.
As you note, the basis in inherited property is typically adjusted either up or down to the fair market value as of the date of death of the decedent from whom you received the property. There are exceptions to the general basis rules on inherited property and the IRS also has specific rules on how to determine the basis and holding period of specific types of assets.
For inheritances your holding period is automatically considered to be more than one year. As an example, when you sell an inherited stock, it’s subject to long-term capital treatment. This applies regardless of the actual holding period of the decedent. For non publicly traded assets determining fair market value may be a major tax valuation headache. For any such high value assets getting a timely qualified appraisal may be a good decision to support the tax basis for eventual sale or tax basis for possible depreciation.
The basis of property you receive as a gift is typically the lower of the basis of the person who made the gift to you or the fair market value at the date of gift.
For anyone who in 2022 sold more than $600 where payment was received from those entities who are required to issue a 1099-K the IRS changed the effective date for the new lower reporting threshold, described in Notice 2023-10, and delayed the reporting of certain transactions in excess of $600, to transactions that occur after calendar year 2022. What a mess to require a business that has geared up to comply with one set of rules and then to delay the change after all the planning and preparation work has been done to comply.
That being said the tax law requires reporting of taxable events regardless if you received a 1099 or not.
Third party information reporting on 1099’s are for the benefit of the IRS to help them discover those who are not complying with tax law. The additional work to issue 1099s is a burden and cost that continues to be shifted to business. I think a longer period on the filing due date of the business having to file information returns with the IRS should be the minimum accommodation to reduce compliance burden on business. I am not holding my breath.
William, thanks for the excellent clarifications and additions. Your expertise is a great benefit to HD readers. The tax code does indeed continue to provide challenges and opportunities to learn!
Years ago, back when you read a book to learn about stuff, I decided I wanted to be able to correctly do my taxes and bought a book titled “Income Taxes for Engineers” or something like that. What I learned is that determining how much is owned in taxes is not about the numbers so much as it is about semantics. And that most of the semantic nuances involved were way past what my engineer’s brain could handle. Since then I have paid someone to do my taxes and try not to look too closely at the results.
Thanks for reading. For the vast majority of us, the changes in 2017 that increased the Std Deduction, and reduced the need for itemizing, had the effect of simplifying the return. For retirees with modest income (~$60K or less), free services like AARP TaxAide are a great resource. Each return is prepared by a trained and certified preparer, and then independently checked by another qualified preparer. We often find minor errors, but the QA process eliminates most of them. Using local preparers also provides expertise in many of the state sponsored programs that benefit seniors, like property tax rebate programs.
“I have paid someone to do my taxes and try not to look too closely at the results.”
I mainly look to see if the correct numbers were input, not the math the software does. However, when I do review my taxes that were prepared for me, I find an error. It’s been four weeks now and I’m still waiting on a corrected tax return. It doesn’t matter if the person doing my taxes is a CPA or a tax preparer (over 50 years in business), mistakes will be made.
If you like reselling, now is the time to go into business. The 1099-K has caused a lot of casual sellers to retire, so there is less competition and a lot of stock in trade is being sold off. Retirees who understand business accounting, and who know how to source, can make good money working independently for as many hours as they like.
And that concert T-shirt? If you bought it 40 years ago for $25, and it’s in nice shape, you can probably get several hundred dollars for it on eBay. Collectible items from the 80s and 90s are red-hot.
I have to admit I have limited experience in the reselling business. We sold some things when we downsized, but my daughter-in-law helped a lot. I learned there is a vibrant market for gentle used baby equipment, especially in NYC. Instead of storing bulky equipment, young families sell strollers and such and then pick up a new or used one a few years later when the 2nd child shows up.