PayPal 1099-K taxable income?!

Discussion in 'The Pub' started by Jason Calieri, Feb 6, 2018.

  1. Jason Calieri

    Jason Calieri Silver Supporting Member

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    Apparently PayPal is sending a 1099-K to anyone in MA and VT who received over $600. Until late last year, the cut off was $20k.

    All of the funds I received during 2017 were from selling used music gear that I’d bought not long before. So how can this be taxable income?! Anyone else had to sort this out?
     
  2. Riscchip

    Riscchip Supporting Member

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    This happened to my brother (in MA) today and I read up a bunch. I'm not an expert, but it seems they are making PayPal send the 1099-K out presuming money taken in through PayPal is income. Then, you have to use schedule C to prove otherwise. So if you buy a guitar for $1000 and sell it for $1000, you didn't make a profit so you theoretically shouldn't owe tax, but now you have to lay that out for them. I'm sure they assume people will be bad about doing this in many cases and they'll collect more tax. If you did earn a profit on anything you sold and received payment on via PayPal, that's a profit and is taxable in the first place.

    This is my non-expert, potentially wrong take that I think is reasonably correct.
     
  3. Jason Calieri

    Jason Calieri Silver Supporting Member

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    It’s crazy to expect people to dig up old transactions and prove it’s not income. Ugh! What a nightmare. I might be done with PayPal.
     
  4. Jay K

    Jay K Member

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    I am not sure (but pretty sure) your profits (not revenues) likely would be treated as capital gains on your tax returns. The capital gains would be the difference between what you paid for each item (including the costs of any improvements), aka the "cost basis." and the proceeds from the sale. In other words your profit on the sale. Whether the capital gains are taxed as regular income (short-term capital gains), or instead at a special capital gains rate (long-term capital gains), would depend on whether you sold a particular item within one year, or after more than one year. If you have capital losses, either on particular gear sales, or on anything else (like stock sales), these would be subtracted from either the long-term or short-term capital gains, depending on the nature of the losses.

    So in sum you will be taxed in some manner on your profits, "in some manner" depending on how long between your acquisition of the gear and the later sale.

    With some work you probably can figure all this out and include it on your tax returns. But if you have an accountant, the accountant will deal with all this.
     
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  5. Jason Calieri

    Jason Calieri Silver Supporting Member

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    Thanks for the info! No accountant for me, most likely, so I’ll have to look into each of the 22 transactions and see if I can trace them back to what I originally paid for each piece of gear. Seems crazy to me.
     
  6. Jay K

    Jay K Member

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    Actually, this applies to all sales, not just those on Paypal. And I suspect the reason Paypal is reporting this is because by law they have to (maybe there was a change in the reporting requirements this past year, I don't know).

    That is not to say everyone follows the tax laws. For example, most people probably do not report and pay "use tax" on purchases made over the internet for which sales tax is not assessed at the point of sale. But it is still illegal in most states for buyers to fail to pay use taxes on internet purchases for which sales tax hasn't been paid. To my knowledge the sellers have no obligation to report internet sales to the states to which their merchandise is shipped, so most people get away with ignoring the use tax laws. I would, however, not be surprised if some states institute such reporting requirements in the future (maybe some already have but I am unaware of this).
     
    Last edited: Feb 6, 2018
  7. Peps

    Peps Fuzzonaut / Fuzzombie / Fuzz Magisterium Bishop Gold Supporting Member

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    I'm screwed. Time to get an accountant.
     
  8. Guinness Lad

    Guinness Lad Silver Supporting Member

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    Not pp's fault, they are just finally legal.
     
  9. sundog964

    sundog964 Supporting Member

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    According to the state you sold it, and therefore you owe taxes on it. Same with a used car, the state gets their cut.

    And it isn't the profit, it is the sale. You aren't a reseller. It will get complicated, and likely require advice from a CPA/Tax Accountant.
     
  10. Riscchip

    Riscchip Supporting Member

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    Sales tax is collected from the buyer when something is purchased, the seller doesn't owe sales tax (or "use tax" as they call it here in California when you buy stuff online, etc. You are supposed to pay sales tax on even stuff you buy used--not just cars.). This is a form 1099 K which is about income, which would include profit from sales on eBay, etc.
     
    Last edited: Feb 6, 2018
  11. Duffy Pratt

    Duffy Pratt Member

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    Just to make things worse for you, depending on your situation, you may be required to depreciate the item. So say you bought a guitar five years ago which you have been using for gigging or recording. Let’s say you bought it for $1000 and now sell it for $500. No problem, right? Not necessarily. In an audit, the IRS might claim that you should have depreciated the item and taken deductions over the five years. The fact that you didn’t means you lose the deductions. But the basis of the guitar still goes down, and you could owe capital gains based on the difference between the $500 sale price and it’s lower, depreciated value.
     
  12. 80s_Dude

    80s_Dude Member

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    That is extremely odd.

    I don't know what a 1099-K is, but from the thread, I gather it is a tax return you need to fill in and send back?

    Why on earth would they (the government) want to make so much work for themselves, when the vast majority of these people will not need to declare it as income?
     
  13. Bob Maximus

    Bob Maximus Silver Supporting Member

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    yup. They're treating it like a business, so it should be treated as a business in the return. I do the same for all my 1099's.
     
  14. 80s_Dude

    80s_Dude Member

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    Surely the onus would be on the government to prove you are selling things as a business, rather than selling personal items?
     
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  15. Jay K

    Jay K Member

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    Actually, the obligation to pay taxes on profits from sales of items does not depend on whether the sales are from a business, or instead are personal. There actually are advantages to it being from a business as you may be able to take some business deductions related to the sales.

    Perhaps the type of personal sale that most think of incurring a tax obligation is the sale of one's home. The basic formula is you subtract the "cost basis" from the revenues received from the sale, and pay taxes on the remainder. However, there is a special provision that provides a relatively large deduction for the sale of one's primary residence, and depending on the amount of profit on the sale, it could eliminate all the federal taxes on the sale. However, this special provision can only be used once in one's lifetime.

    There is no such special provision for the sale of personally owned music equipment (said somewhat facetiously).

    This article lays out some of the basics: https://www.hrblock.com/tax-center/income/other-income/capital-gains-garage-sale/
     
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  16. 80s_Dude

    80s_Dude Member

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    We don't have capital gains tax on a private house here, but surely, no jurisdiction would expect to be paid tax on the sale of secondhand private items?
     
  17. Jay K

    Jay K Member

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    That is interesting. You must live outside the United States. The obligation to pay capital taxes on the profits from a private home sale is federal law in the United States.
     
  18. Jason Calieri

    Jason Calieri Silver Supporting Member

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    I get that it’s considered income, I’m just amazed the threshold was lowered from $20k to $600 in MA and VT. Unbelievable.
     
  19. Jay K

    Jay K Member

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    One other thing (I don't know why but some topics here pique my interest, even if they are not directly relevant to my own situation). I just saw Massachusetts and Vermont did pass a law that lowers to $600 the threshold for reporting revenues on a 1099 K. It remains $20,000 for residents of the other states, although there is speculation some of the other states will follow the Massachusetts and Vermont examples in the future.

    Interesting given 1099 K's are IRS-issued documents. But I guess the states have a say in when they are required as well.
     
  20. 80s_Dude

    80s_Dude Member

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    I did not know that, I thought states in the USA set their own tax laws.

    But surely even there, you would not need to pay tax on the sale of say a secondhand guitar or amp? Unless you were doing it as a business.....
     

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