Paypal Changes for 2022

@thyname This is getting even more confusing. The simple fact that you received a 1099 when you don't have a business throws a monkey wrench into the whole tax filing process. There are good links above that indicate that getting a 1099 from Paypal should not happen if you don't have a business. But you got one and now you've got to figure out what to do with it.

It is my understanding that you can't just ignore a 1099. If your return doesn't account for it somewhere then you will get a notice from the IRS that you have a problem with your return. Schedule C is the only place I know of to account for a 1099. I do consulting and I've received many 1099s. Schedule C is where you account for your expenses against the 1099 income. It is not set up to account for the sale of personal items if you have no business. The problem is that I don't know of any other form that deals with 1099s.

I searched using multiple criteria and I found several articles saying that the Paypal 1099 is not intended for the casual sale of household goods but I could not find anything that described how to account for it on your return if it only includes the sale of household items.

Too bad we don't have a CPA in the group who would generously provide us free advice. In the absence of that I think you'll have to go to a CPA for an answer. When you get this figured out please let us know.

I agree with ghasley that this is a nothingburger. Here' why. The following assumes that you buy and sell gear as a hobby and that you do not have a business buying and selling things like amps and DACs.

For 99% of the gear you sell you will take a loss. When you report your taxes you will fill out your form and show that you took a loss on the items you sold. Therefore, no taxes due. If you sold 10 pieces of gear and took a loss on 9 of them you can use the total loss amount to offset the gain you made on one piece. No tax due again.

You do not need the receipt. This is because you do not send copies of your receipts when you file your taxes. The only time you might possibly need a receipt is if you get a TCMP audit (Taxpayer Compliance Measurement Program) where an IRS agent will go through your return line by line. This is very rare but if it happens you can show the agent that the retail price of the item is higher than the price you sold it for.. Any documentation will do - i.e. magazine review, internet review, audio buyer's guide, etc. If you bought it used you can probably locate a record of the transaction (email confirmation for example) to show that you sold it for less than you bought it for. Even if you have no records there's a miniscule chance that the agent will sweat you about it. They've got much bigger fish to fry. Just treat them with respect and don't piss them off.

I've had a TCMP audit and it's no fun but I can tell you that the agent is way too busy to be concerned about a few pieces of audio gear. They also operate by using common sense. Everybody knows that audio gear depreciates over time and trying to charge you income tax on something that obviously depreciated would never stand up if you contest the audit..

In other words, relax. When you file your 1040 for 2022 and you have a few 1099s for audio gear, just show that you sold each item at a loss. It's really that simple. Nobody will pay taxes on hobby items that they bought and subsequently sold at a loss.

Have a beer. Listen to some Trip Hop. It's going to be OK.

@thyname : Here is some further explanation. The following is my understanding but I'm not an accountant and I'm welcome to be corrected if I get any of this wrong. Overall, I'm speaking from a practical standpoint as opposed to a strict legal standpoint. Another point is that the IRS publishes rules regarding any change in the tax code and this issue will be no exception. Some time this year we will be able to see specific rules on how to handle this.

The first thing to realize is that this law was not intended for us. It's aimed at people who are acting like a business (making money in other words) and not reporting their income. If you have a handmade jewelry store on Etsy and you never formed a business and never got a tax ID then the IRS is coming after you.

A 1099 from an entity like Paypal will have only one line that represents the total amount you received. It will not be itemized. When you do your taxes you will show a combined cost basis for the money received.on your 1099. I do not believe that you will be required to list each transaction and note the cost basis for each individual item. The government does not want to make things any more complicated than necessary.

The above is why I said that you can offset any gains by losses. It will all be combined into one line. Technically the IRS could argue that if you made $500 on one phono cartridge but lost $5000 on other audio gear then you should pay tax on the $500. However, there is an allowance for grouping transactions for an "Activity." Gambling is the best example. If you win a $10,000 jackpot but you can show that you lost $15,000 gambling in the same year then you don't have to pay tax on your winnings. In our case I think it could be shown that someone who buys and sells a lot of stereo gear could have that considered an Activity and pay taxes on the net profit for the year - likely zero.

Lastly, I can't emphasize enough, this only matters if you get audited which for most of us will never happen. Even then I guarantee that the IRS agent isn't worried about the slim possibility that you made a little bit of money selling an obscure phono cartridge. If you go into the audit and show the agent a picture of your stereo and describe how many components, records, and CDs you own, and explain that you buy and sell a lot of gear, almost entirely at a loss, he's going to roll his eyes and move on. Your little stereo hobby is a total waste of his time and resources.

I think it's going to be hard to abandon Paypal over this. Every payment service like Paypal is going to have to conform to the same rules which means that you will have to go outside of the normal transactional system. I would not buy or sell anything from anyone who would not accept Paypal because that's the first sign of a scammer. The thought of sending a money order to a complete stranger is laughable. Cryptocurrency? I don't think so. In my case I'll just put up with the minor hassle of adding a line to my tax return and go about my life.

@thyname Well, I've about reached the end of my knowledge on this issue. I didn't realize that Paypal itemized all of the transactions.

At this point I'm sort of guessing but here goes. You would normally list any income and account for a 1099 on Schedule C. On this schedule you have the opportunity to deduct expenses. In our case we would deduct the original cost of the item(s).

I'll look forward to the IRS publishing the rules around this change (I live in Washington) but you will have to file before that happens. It's obvious to me that the current rules (I looked them up) were not put together with this type of situation in mind.  Without knowing any more than I know now, here's how I think I will handle it when the time comes.

If my Paypal 1099 only represented audio gear I would lump it all together on one line on Schedule C and show that I had a loss. If the 1099 had more than audio gear then I would break it into categories and put down the profit or loss for each category. You don' need receipts - if the original cost is in the ballpark that is close enough. The main thing would be to account for the total of the 1099 on Schedule C so that your return matches IRS records. Again, I'm speculating, but I think the IRS doesn't want to worry about selling household items at a loss. I just can't believe that the IRS wants to get into the weeds regarding the sale of amps, turntables, used books, old computers, and gramma's dishes. As long as your schedule C matches your 1099's you should be fine. But I've been wrong before......