It looks like I am getting a 1099-k form from PayPal for the first time. I sold a lot of audio items last year, used, while upgrading my system and swapping things around. Obviously I am not a business, not in this for profit, and did not make money, lost money. It’s just a hobby, a costly one.
I am guessing I have to report this with my taxes. However, the form only has the gross proceeds from PayPal, not my original purchase price. How do I deal with this? Any particular section on Turbo Tax to enter these?
TurboTax says to manually add the amount in Miscellaneous Income as hobby income, but don't declare expenses there. Then go into Other Miscellaneous Income and enter your expense (e.g. original purchase price) as negative income (up to the amount in the 1099-K). The result is that you only pay income taxes on the net gain (if any) when purchasing and then reselling an item.
My conclusion is that there is no specific place to enter 1099-K amounts on the tax form. However they must be accounted for as part of the total income, so manually enter it as miscellaneous income. Separately, subtract expenses by declaring negative income items. A bit convoluted, but it makes some sense. It would help a lot if TurboTax integrated this into their guided steps.
BTW, if you are a business, TurboTax basically says to ignore 1099-K. It is part of business income that should have been entered somewhere else on the tax form.
Even if you set up a company for the transactions from your hobby it seems to me you would have to depreciate items over a certain dollar amount. I have to do this with certain items I use in my businesse. I have no idea how this would work if you owned the stuff for several years and never depreciated them.
You guys pay so little personal income tax that your ever-more-European states are going to have to pull in every dollar they can from every other source. Over here in the UK I pay 25% tax on the first half of my income and 40% on the second half, about 12% on a the whole lot for mandatory National Insurance. Any active audiophile over here would set up a limited company (£80 one-off fee, done online in 20 minutes), but and sell all their kit in the company name and pay 20% tax on any profits (which will be £0.00), and charge the company loads of expenses just to make doubly sure it makes a good loss every year. My 17 year old son has a small studio in a shed in our garden and he has his own Limited Company for this very reason.
Shouldn't it work both ways? You sell for a profit and pay taxes, You buy a product and sell for a loss you take the loss. Any accountant should be able to handle this for you to come out in the good! also who ever says the irs are nice to deal with is crazy, there thieves m.
As a California resident nothing surprises me regarding tax collection. Try buying cigars online. I canceled a recent transaction before completion . There was a 8.75 % state sales tax added for Ca and a $.99 cent State Of California Franchise Tax registration fee . Upon further research , my purchase was to be reported so I could then file ( at my expense ) and pay an additional 56.8 % tax on my purchase . So every $100 incurred a total of 65% state tax . I also had an in law that earns $330 K a year salary receive a letter from the state that said based on his income he owed an estimated amount to California for undetermined miscellaneous internet purchases . The funny thing is , he doesn’t shop on line at all . I no longer buy cigars in America and my online purchases go to my cabin in Oregon . Good luck with the IRS . Having a friend that is employed as one of their collectors , my opinion is that they are looking for the truth and an honest person is believed . Cheers, Mike .
I have to agree with Jetter. Never had an issue dealing with anyone from the IRS. If you are nice to them and honest, you get the same treatment back. I am sure there are bad apples, power can do that, but not my experience yet.
As a CPA part of my job with the large companies I worked for was to be the liaison to the IRS when the IRS audited us. In fact, most large companies such as mine had established permanent office space in our building for the IRS as each tax year is normally subject to IRS audit.
It has been my experience that the IRS is a very reasonable group of people. In fact most I met are really great people, audiophiles, hunters, our neighbors In more years than I will mention I never met one out to screw anyone. If you can verify that the numbers you have put on your tax return are correct, they will accept it. In fact, an IRS agent that can be shown to be acting incorrectly will most often be disciplined and likely terminated.
Bottom line, if you can show in the event of an audit that the amount of taxable income you have on your tax return is correct, you will prevail.
Now I am only talking about us hobbyist selling our personal audit gear, the problem is the 1099K is only showing the IRS how much money you sold your items for. But the IRS only wants you to pay tax on any profit, the excess of sales price less selling expenses over your cost. The BIG PROBLEM I would have in this case is finding the invoices showing what I paid for the equipment to prove I did not make a profit on it. I don’t think I could for a lot if not most of my older gear.
PayPal just stomped a very large sale over the holidays because it was "over my recent sales pricing." Guess they forgot the 5 figure sales per transaction - reported the income - done with Japan and Eastern Europe for 10 years. Never had an unhappy customer. Now they want me to prove who I am and a lot more. Guess I am being ’disappeared.’ Flame off.
I think PayPal is under the gun because of cryptocurrency transactions as well as the $5k money laundering limit. I think ETSY, etc. has something to do with it - craft hobby and artisan businesses - who reports that stuff? I’ve met couples who have been making a great living making ’artisan’ items for decades and have never declared a dime in income.
My advice is to get a good accountant. You’ll get back more than his/her fee.
The only time I was ever audited was when I did my taxes with Intuit. If the ’accountant’ you find uses it, run.
In addition to the OP problem, PayPal reported all my proceeds even transactions that were immediately canceled and refunded before any merchandise changed hands. This has the effect of overstating my taxable income by $7,000. I have been trying to get PayPal to send me a corrected 1099.
My advice is if you get a 1099 from PayPal, check it carefully to make sure they aren't overstating your income.
Thanks to all who posted very informative. Also I'm amazed that there is not a "cost basis" associated with this "income" in the IRS doc. Jeez.
I too used TurboTax for years until it got too complicated, my taxes that is. Best thing is get a local CPA and do some tax planning as well, pays for itself.
Forget this notion of "tax brackets". With very few exceptions, taxation is incremental. I.e. earning a bit more does not mean everything else if taxed more. Only that extra you earned is taxed at a higher rate than everything else. This is not a new concept.
Not only legal, but it has pretty much always been this way, the only difference is in the past, the government has not had the means to track and collect. Now effectively they do. Most states have had taxes on used cars, boats, etc., anything where a transfer of ownership has to happen and can be tracked.
I'm glad someone brought this up. PayPal did this to me this and last year.
Can someone explain to me how it is legal to tax me for selling a product that I previously purchased new, and paid sales tax on, with money I was already taxed on when I earned it?
Last year they added what I sold off to my income which put me in the next tax bracket and I got hardly any tax return.
Better yet, can someone tell me an alternative for payment that we can trust and that won't rob us like this?
The simple solution is to move out of the "there's no such thing as too much tax" socialist state you're in and move to one of the no income tax states where the inmates aren't in charge of the asylum. That's my political opinion as an audiophile. Seriously, if you can't neutralize the 1099 in Turbo Tax Deluxe, a competent tax preparer (local CPA firm that prepares taxes, not the the H&R Block types) can solve your problem in about 15 minutes.
Great answers here and I have nothing to add but KEEP ALL RECEIPTS! eBay became a contracted tax collector last year. Not by their choice but the states that want that extra tax money in their coffers. What I still fail to grasp is that tax has already been paid on any used item you sell. Unless you make a profit, only the profit amount should be taxed. This amounts to tax on tax in my mind. Can anyone explain it better to me? AB
Why did I receive a 1099-K if I didn’t meet the IRS reporting threshold?
Some states (VT, MA, VA, IL, MD) have reporting obligations at a threshold lower than the federal reporting thresholds:
Vermont, Massachusetts, Virginia,andMaryland: $600 USD in gross payment volume from sales of goods or services in a single calendar year regardless of the number of transactions.
Illinois: $1,000 USD in gross payment volume from sales of goods or services in a single calendar year with at least 3 payment processed.
Received a 1099-k here as well. Absolutely nowhere near 20k in sales. A lot of purchases were made. Politicians are always trying to stick their hand in your pocket.
Been selling on Ebay since 2004 and last few years been receiving these 1099’s. I receive them even if I only sold say 20 items amounting to say 1500 bucks! Last year I sold what amounts to about 10k and maybe 12 transactions, both below the threshold of 20k and 200 transactions. I just make a chart every year indicating item description, my original cost, and the sale price. The last column is what I either made or lost, usually lost....if it’s a loss it cannot be considered a profit. My tax guy takes all this info and adds or subtracts it all up, plus deducts business expenses etc, computer paper, ink, labels, electricity, etc...he is usually able to reduce my tax burden by 50% or more. It sucks, but it will suck more if not reported at all. In essence, you buy a new product and pay state sales tax. You get sick of said product and sell it on ebay usually at a loss, and the irs sees this as income and taxes you on it again....its ludicrous really. What’s worse is some of the crap sold/formerly owned is still being paid off on several credit cards! It’s insane really. My tax guy said you are supposed to report income even from a garage or yard sale! 🙄....all income must be reported according to him.
I would call PayPal and be very stern with them. It appears they have falsely issued the 1099 and they need to riscind it otherwise it will cause you no end of paperwork pain. This is there mistake and they need to fix it. I suspect you will need to elevate this probably up a few levels.
As noted the IRS now possibly thinks this is income and you are looking at big numbers when all your stuff is mixed.
PayPal appears to be covering their asses by screwing you. It is over 20K and 200 transactions. One could even say they are violating your confidentiality as they appear to have no legal reason to report this data.
Another informative Turbotax article which explains why you received a 1099K even though you didn't meet the 200 and 20,000 thresholds (short answer, for basically no reason):
typically a 1099k is reported on a sch c for sole proprietor or single memebr llc or business returns.
I do not use turbo tax to prepare my clients returns but if they instruct you to report as other income just make sure there is a spot to input info from the 1099k to a 1099k input form. Even if you zero this out in this area and it does not show as a 1099k which the irs recieves and cross checks to make sure you have reported on your return.
I just compiled a list of all payments received with PayPal during 2020. Including the PayPal friend & family, some not even related to Audio at all (just real friends and family stuff), I had received a total of 48 payments. Definitely NOT two hundred. I don’t know why they issued me a 1099-K. Some of my sales (3-4) was really large, components stuff, so yes, I received over $20K, but I thought it was payments over $20K, AND over 200 payments received.
And I am definitely NOT a business. Why do I have to make up such story?
As for the “invoice” thing, I only had sent 6 invoices, those who asked me to over at USAM.
Anyways, thanks all for chiming in. I will figure this out. It’s just going to take time and effort I was not prepared to have.
I'm guessing its because the buyers asked me to send them a "invoice" (i.e. not Friends and Family payment option) so because of that Paypal treated the transactions as business sales. None of the other dozen or so friends and family transfers from 2020 appear on the 1099-K.
The 1099 only reports proceeds. Proceeds minus basis = profit (loss) on the item. The problem with the sale of personal property is that not to many people keep evidence of their basis in everything they own. Making this worse, you have to declare the "profit" in the item sold for more that you paid for it, but you cannot declare a loss for items that sell for less. There is no offsetting of losses in the sale of personal property. I'd like to know what a tax professional would tell you to do. Estimate the basis?
If you can remember what the things cost you then you can deduct the cost since you already said you lost money. If you lost money, you don't owe taxes on the sales. You just need to deduct what you originally paid on them (since you most likely did not take depreciation against your taxes in the past). It's a pain but if you sold more than $20,000 AND over hit 200 items sold, then you have to deal with the 1099
1. Upgrade to the better TurboTax. Forget the name, it's obvious when you see it. 2. Follow filing instructions. 3. Call if questions. 4. Pay the extra for Audit Defense. Totally absolutely won't regret it awesome. Just Do It. 5. Did you see the step to ask audiophiles tax questions? No. There's a reason for that. Think about it.
They should only do this IF you both exceeded $20K and over 200 transactions.
Question: Do you use Ebay/Paypal for non-audio stuff? Did you use the same account for both? That would of course be a no-no. Never mix business with pleasure. Possibly if you have the same name and address on two different accounts they treat them the same.
If you didn’t do the above, it would seem to me that you should contact Paypal and find out what’s up.
Be careful you never charge taxes for personal sales either. If you did, that would also be an issue if you charged and collected sales tax.
Another potential issue to investigate as a guess is if you sold to a dealer, and not to an individual. They would be reporting their purchase as an expense, and perhaps Paypal mistakenly always generates a 1099-K if you sell to a commercial customer. Clutching at straws, but trying to give you things to investigate.
Just posted my response and see you already received a response from turbotax which is the same as the last few paragraphs in my link above.
The reason I did not want to give the last paragraph in the link above as the answer, which turbotax did, is because they are saying to record the cost of your equipment sold as an expense of the sale. In the corporate world the cost of your equipment would be a cost of good sold, versus an expense of the sale.
But if turbotax says to list it as an expense of the sale that is your guidance from the individual tax experts. Just be sure that the total expense of sale you put does not exceed your 1099K proceeds.
Thyname, the best bet is to have a specialist in individual taxes look at this or even better email turbotax for help if you can. I am a CPA but from the corporate tax world and I can usually figure out this individual income tax stuff, but not here.
I did some looking around the IRS publications and guidance and nowhere could I find where it would address your exact situation. It seems like it should be really easy but there are complexities that I find that are too long to write about here.
It should be straight forward. I am not ready to do my taxes yet, as I have not received all tax forms for the year.
I will also put together a spreadsheet with all items sold via PayPal, along with cost and original purchase details, just in case I am audited. I think I have all the purchase info, either PayPal purchases, or dealers’ invoice / receipts. It will take some time and effort, but doable.
The key on this seems to be the definition of “business” vs “hobby”, and this is definitely NOT a business for me. Certainly a money losing hobby. It should be easy to prove it to IRS in case of an audit.
So many variables/possibilities (why I mentioned contacting a tax attorney). Wish I could better advise you, but- my tax situation is vastly different.
@lalitk —- me too, and never had received one before either.
I guess this was the first year that I met both those criteria (over $20K in PayPal payments, I had ~$27K, AND 200 or more transactions). I cannot believe it 🤭😂
——— If your Form 1099-K is for casual one-time sales and is not a business or even a hobby with recurring income (this can include income from PayPal, Square Card reader, or other electronic payments) enter the income in TurboTax by going to Misc Income and selecting the last option. Enter the description as income from 1099-K and the amount.
I would consult a tax attorney. I just researched and it appears 1099-K is intended for folks in business or self-employed,
“Form 1099-K, Payment Card and Third Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance. You should receive Form 1099-K by January 31st if, in the prior calendar year, you received payments:
from payment card transactions (e.g., debit, credit or stored-value cards), and/or
in settlement of third-party payment network transactions above the minimum reporting thresholds of –
gross payments that exceed $20,000,AND
more than 200 such transactions”
I have been buying n selling audio gear through PayPal for years and never seen a 1099-K form.
@rodman99999 —- can you please elaborate? I am definitely a business, not doing this for profit, I am losing money.
It has to be something else. Maybe a “hobby” thing, section, on TT, or something else. I cannot possibly see how I will have to pay taxes on something I did not make money from.
In that case: you’re paying the state's, "lawmakers" not to lock you up for, "Possession". They’ll pocket MUCH more, that way (all they really care about). Enjoy the buzz and count your blessings!
Whatever you do, don't forget it... Only time I was ever audited was behind a "NEVER SENT" 1099, to me.. but was sent to the IRS, 7 year later, the audit, then the state stepped in.. Before it was over, a 3300.00 misplaced 1099 was over 18,000.00 USD. To the Fed and State..
Oh they offered a payment program.. LOL I had the payment served to the two agencies, they had to sign for their money.. Actually my money..
Tea party 101, man I was a pissed off publican. 25 yeas ago, I was trying to pay off a hospital bill for my kid still. A little over 100k.. That took 12 years.. He's all good now.. :-)
I paid a lot of STATE taxes through EBay last year, too. Close to 11% on every single purchase. NUTS HIGH taxes..
They all collect taxes now. I just wonder if the state is getting it? I'll bet there is a LOT of "Tom Foolery", with the funds.. just too much money NOT to get messed with..
You aught to see Weed taxes in CA.. over 20% + state taxes.. THIEVES!
You’re being stuck/1099ed for supposed, "profits". The only option is filing a long form (a 1040, the long way); deducting whatever might be considered, "business expenses". ie: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses Only you can determine if it’s worth the time/effort (possibly: business license, contacting tax attorney, etc). Remove the space between, "the" and, "IRS"; to find the government’s foundational attitude, toward your finances.
You must have a verified phone number and physical address in order to post in the Audiogon Forums. Please return to Audiogon.com and complete this step. If you have any questions please contact Support.
