Ebay tax reporting drops from $20,000 to $600

[sb1]

Bob,

A question on terminology for you. If a casual seller(not a business) on ebay or here or anywhere else, sells an item at a price lower than paid(probably more likely in the event of used merchandise than cards) no "taxable event" has occurred, yet they are receiving a 1099 for the gross proceeds.

In theory the new 1099 issuance is creating a tax reporting requirement that is many cases not required, as no tax liability was created ???

[BobC]

Originally Posted by sb1

Bob,

A question on terminology for you. If a casual seller(not a business) on ebay or here or anywhere else, sells an item at a price lower than paid(probably more likely in the event of used merchandise than cards) no "taxable event" has occurred, yet they are receiving a 1099 for the gross proceeds.

In theory the new 1099 issuance is creating a tax reporting requirement that is many cases not required, as no tax liability was created ???

Scott,

You've sort of got it right. Whether a casual seller sells an item on Ebay for a profit or a loss, the sale itself is always still technically a "reportable taxable event", regardless. But as you stated, if the casual sale resulted in a loss, so there would be no actual resulting tax actually due, the IRS and other taxing authorities are not really going to care if the sale wasn't reported on your tax return.

However, because the IRS religiously matches 100% of all 1099s they receive to taxpayer tax returns, if you got a 1099-K for a casual sale on Ebay one year where you lost money, even though you end up owing no tax on that sale, you do now want to report it on your tax return because if not, you're getting a letter from the IRS assuming your gross sales was all income you should have paid tax on.

The issuance and your receipt of a 1099-K form does not technically create a "tax reporting requirement" though. You're technically supposed to report all taxable events on your tax returns, whether included on a 1099-K form or not. What the issuance/receipt of a 1099-K form does is create a "tax compliance opportunity" for the IRS to double check the casual seller to make sure it looks like they are complying with the applicable tax laws. Hopefully you see the difference in the nuances.

If there is no 1099-K reporting of a casual seller's sales activity, it is pretty much up to their own conscience whether they report this activity on their tax returns or not. But whether they choose to report such activity or not, every sale is still technically a "reportable taxable event", whether for a loss or a profit. Just like every trade is also a "reportable taxable event". I 've said this before that all card trades, whether involving any cash as well or not, are also taxable events. People may choose not to report them on their tax returns, which is their personal choice. But if ever down the road you do get questioned by the IRS about your tax basis for say a T206 Red Cobb you sold, and you pull out an invoice from Brockelman Auctions for a different card you previously traded straight-up for that Cobb to now show your original tax basis, don't be shocked if the agent might start asking a lot more questions.

And just because the original casual sale you mentioned was for a loss, it doesn't always mean it may not still have tax consequences for the seller. As a casual sale, the seller is not going to be considered to be a Dealer in business. But is the casual seller then classified and operating as a Collector or as an Investor? As a Collector, the sale is part of the seller's hobby, and no losses are deductible. If operating as an Investor though, investment losses are potentially deductible, or eligible to carry over to future tax years as capital loss carryovers. So in the end, you may want to think about reporting a casual sale loss on your tax return after all.

[sb1]

Thanks Bob,

Agree and understood.

Just curious how they match up the 1099's.

In my other business, non-card related, I receive a handful of 1099's. All my CPA does is copy them and keep them with the return and none are ever line itemed, just lumped in with the rest of the business income, of which they are a small fraction. The return is electronic, so how does the IRS see or account for them?

Is this normally how they would be handled?

Scott

[BobC]

Originally Posted by sb1

Thanks Bob,

Agree and understood.

Just curious how they match up the 1099's.

In my other business, non-card related, I receive a handful of 1099's. All my CPA does is copy them and keep them with the return and none are ever line itemed, just lumped in with the rest of the business income, of which they are a small fraction. The return is electronic, so how does the IRS see or account for them?

Is this normally how they would be handled?

Scott

Depending on the type(s) of 1099s one gets (1099-K, -MISC, -NEC, -INT, -B, -S, etc.) there are certain places on one's tax return where these normally end up being reported. All 1099s the IRS receives, either electronically or via paper copy, are eventually entered into their computer system, and totaled by the various 1099 categories. Everyone's tax returns, either electronically or paper filed, are also eventually entered into the IRS' computer system as well. And then at some point they will run a matching program to make sure that the various 1099 totals, being independently reported to them, are also being reported by you on your tax return. They don't actually match up individual 1099s, they look to see if you've at least reported the total amount(s) of what was shown on the 1099s you also should have received. If the amounts reported on your return match or exceed what was shown on your 1099s, you're generally good to go.

If you reported less income on your return (or maybe put it in the wrong place) than what was reported on your 1099s, the IRS' computer system kicks it out as an error, and normally generates an automatic letter to the taxpayer outlining the discrepancy, as well as how much they calculate that you now owe them, plus interest and penalty charges, if relevant. They assume in the case of a 1099-K discrepancy that the total unreported gross sales reporting difference is ALL taxable income, with no offsetting costs or expenses. In other words, the opposite of criminal courts. You're guilty of owing the taxes they say you owe, until you can prove your innocence and that you actually owe no, or less, tax than they say.

This matching and sending out of letters in case of discrepancies counts as a formal IRS audit by the way. You do not need to actually meet in person, or even talk to an IRS agent on the phone, to undergo an audit. And it could take a year or two before the IRS gets around to running the cross-match of 1099s and people's tax returns. The IRS actually has three years from the later of the due date of a return you file, or the actual date you filed it, to examine and commence an audit of your return under normal circumstances.

And this is exactly how this is normally handled by the IRS. They are slow, overworked, understaffed, and dealing with what is now considered a crappy and somewhat outdated computer system, that has already been successfully hacked at least once to my knowledge.

This should have covered all your questions Scott. Have a good one.