PayPal 1099 - bad news for MA and VT residents

[Peter_Spaeth]

Originally Posted by Snapolit1

Do not believe that's true unless you can substantiate that you are running a business and not a hobby. Occasional sales probably a hobby. Can't offset hobby expenses.

That's always been my understanding.

So if I buy a card for 1000 and sell it for 800 I owe taxes?

[Snapolit1]

Originally Posted by Peter_Spaeth

So if I buy a card for 1000 and sell it for 800 I owe taxes?

No. What I was trying to say is that a sports collector cannot sell $3000 worth of cards in a year with a $2500 basis and say I didn't really earn income of $500 because I separately had $500 of expenses. Expenses don't figure into the equation unless it's a business you are running.
That's my understanding of how it works, but I am not a tax professional.

[bobbyw8469]

Originally Posted by Snapolit1

No. What I was trying to say is that a sports collector cannot sell $3000 worth of cards in a year with a $2500 basis and say I didn't really earn income of $500 because I separately had $500 of expenses. Expenses don't figure into the equation unless it's a business you are running. PWCC is running a business. I make occasional sales but can't seriously argue its a business.

That's my understanding of how it works, but I am not a tax professional.

I sell about $30,000 worth of cards on Ebay that I pay $33,000 for. Am I running a business? Or is it a hobby? Hell, you can sell just 2 Hank Aaron rookies and exceed their monetary threshold.

[Snapolit1]

Originally Posted by bobbyw8469

I sell about $30,000 worth of cards on Ebay that I pay $33,000 for. Am I running a business? Or is it a hobby? Hell, you can sell just 2 Hank Aaron rookies and exceed their monetary threshold.

https://www.irs.gov/newsroom/busines...for-deductions

[BobC]

Originally Posted by bobbyw8469

I sell about $30,000 worth of cards on Ebay that I pay $33,000 for. Am I running a business? Or is it a hobby? Hell, you can sell just 2 Hank Aaron rookies and exceed their monetary threshold.

To receive the 1099-K form at year-end that reports your proceeds to the IRS, in addition to having to have at least $20,000 of sales, you also need to have at least 200 transactions. So just two sales would not necessarily trigger the party responsible for preparing the 1099 forms to generate for you under those circumstances. The two states mentioned by the OP have put forth there own requirements for reporting such income to them. That doesn't mean those sales are also being reported to the IRS but, I would guess that as long as whoever is preparing the 1099 forms to send to those states is doing that, they'll probably just go ahead and send them to the IRS as well. Just because the IRS rules don't require someone to send them a 1099 with your sales on it doesn't mean they can't go ahead and do it anyway.

Here's a link to another article that nicely spells out what the IRS is looking for in determining if you are a hobby or a business, in more straightforward language. You have to look at the various considerations the IRS uses and review each situation separately for the specific facts and circumstances.

https://www.kahnlitwin.com/blogs/tax...bby-a-business

The big rule of thumb that is most often followed is the "3 out of 5 years of income" rule, which is what is most commonly referenced when someone talks about the "Hobby Loss Rule". But, even if you have fewer than 3 years of income in the prior 5 years, you can still argue that the intent was to be a business and be profitable if you can show a good reason why the losses occurred. Just not as easy an argument to win with the IRS.

[bobbyw8469]

Originally Posted by BobC

To receive the 1099-K form at year-end that reports your proceeds to the IRS, in addition to having to have at least $20,000 of sales, you also need to have at least 200 transactions. So just two sales would not necessarily trigger the party responsible for preparing the 1099 forms to generate for you under those circumstances. The two states mentioned by the OP have put forth there own requirements for reporting such income to them. That doesn't mean those sales are also being reported to the IRS but, I would guess that as long as whoever is preparing the 1099 forms to send to those states is doing that, they'll probably just go ahead and send them to the IRS as well. Just because the IRS rules don't require someone to send them a 1099 with your sales on it doesn't mean they can't go ahead and do it anyway.

Here's a link to another article that nicely spells out what the IRS is looking for in determining if you are a hobby or a business, in more straightforward language. You have to look at the various considerations the IRS uses and review each situation separately for the specific facts and circumstances.

https://www.kahnlitwin.com/blogs/tax...bby-a-business

The big rule of thumb that is most often followed is the "3 out of 5 years of income" rule, which is what is most commonly referenced when someone talks about the "Hobby Loss Rule". But, even if you have fewer than 3 years of income in the prior 5 years, you can still argue that the intent was to be a business and be profitable if you can show a good reason why the losses occurred. Just not as easy an argument to win with the IRS.

Then the IRS has no clue as to how competitive the baseball card market actually is.

[BobC]

Originally Posted by bobbyw8469

Then the IRS has no clue as to how competitive the baseball card market actually is.

Virtually every business market is competitive. The IRS doesn't need to have a clue, nor care one iota. All they know is that if you have net income, regardless of what/where it is from, you should be reporting and paying them tax on it.

[calvindog]

Originally Posted by Snapolit1

No. What I was trying to say is that a sports collector cannot sell $3000 worth of cards in a year with a $2500 basis and say I didn't really earn income of $500 because I separately had $500 of expenses. Expenses don't figure into the equation unless it's a business you are running.
That's my understanding of how it works, but I am not a tax professional.

I believe this is correct.

[BobC]

Originally Posted by Peter_Spaeth

So if I buy a card for 1000 and sell it for 800 I owe taxes?

No! If you are actually considered to be in the business of selling cards, you would report a $200 loss for the year if this is all the activity you had, and you'd be able to deduct that loss against your other taxable income. If you are considered to be in a hobby, you can still deduct the cost of the card against what you sold it for but, if you end up with a loss, you don't get to deduct it against your other income. You basically just show it as though you broke even.

And flip the scenario around and say you bought the card for $800 and then sold it for $1,000. If you are considered to be in the card selling business, the $200 net profit you generated would be included as part of your taxable income, subject to ordinary income tax rates, at a maximum rate of 39.6% for 2017. Also, if considered as a business, this would also likely be considered self-employment income and you'd probably be liable for self-employment taxes (social security and Medicare taxes) on that same net income, on a combined employer and employee rate of as much as 15.3%. And that is in addition to what you would owe as income tax on that same $200 net profit.

If you were considered to only being in a hobby instead, you would still have to include the $200 of net profit on your tax return but, now it would be considered a capital gain from the sales of a collectible, subject to a maximum income tax rate of only 28%, and there would be no self-employment tax owed.

These are very simple examples assuming the individual is operating more or less as a simple, sole proprietor, and not operating as a corporation or other business entity. I'm quoting maximum and potential tax rates also. To determine how much someone would really end up owing, you'd have to go through all the items in their returns and add in everything to see where they really come out in the end.

On a possible positive note, the new tax reform act may hold a benefit for those considered to be operating as a business. The new Section 199A calls for a deduction of up to 20% of the net income from pass-through entity businesses that meet certain requirements. To my knowledge, it appears that someone selling cards would be able to qualify for this. Again, you'd have to look at each person's specific tax facts and circumstances to determine the actual impact this may have on their returns starting in 2018.