PayPal 1099 - bad news for MA and VT residents

[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.