Tax Q: Paypal 1099k

[liteningme]

H got a 1099K from Paypal for 2021 because he used Paypal to sell his camera. (He just wasn't using the camera anymore so he wanted to recoup some of the cost. It was expensive to us.) Apparently because of this 1099K, we now have to file as self-employed and report "business income and loss" from a sole proprietorship, etc. 

We're using TaxAct to file. I am trying to figure out if he should deduct the amount of money he got for the camera as an expense -- would it be "supplies" because that's how much the camera was worth (actually it cost more when he bought it obviously)? Or does he just straight up owe income and business tax on the money? 

Do we need to dig up the receipt from when he purchased the camera years ago? It seems weird to pay business and income taxes on something that he just recouped some of his expenses for (he sold it for less than it originally cost new obviously).

Any insights would be appreciated! 

[awkwardpenguin]

1099-Ks are actually just informational. A lot of tax software handles them incorrectly and assumes they are business income, because they usually are. However, a 1099-K for selling personal property at a loss is not taxable income, and therefore does not have to be reported at all.

1099-Ks are usually only generated for $20k in payments or over 100 transactions, but some states have a lower threshold for when they have to be sent. I'd guess you're in a state with a lower reporting threshold and that's why you got one.

[awkwardpenguin]

Here's a FAQ with examples from Virginia.

www.tax.virginia.gov/news/did-you-receive-1099-k-what-you-need-know

[jwright]

Jan 27, 2022 10:41:58 GMT -5 awkwardpenguin said:

1099-Ks are actually just informational. A lot of tax software handles them incorrectly and assumes they are business income, because they usually are. However, a 1099-K for selling personal property at a loss is not taxable income, and therefore does not have to be reported at all.

1099-Ks are usually only generated for $20k in payments or over 100 transactions, but some states have a lower threshold for when they have to be sent. I'd guess you're in a state with a lower reporting threshold and that's why you got one.

Actually, the new federal law for 2021 is a threshold of $600 with no minimum number of transactions to file the 1099-K.  This was part of the American Rescue Plan Act.

To properly report this, you would report on Schedule D (not Schedule C) because the camera is a capital item.  If you sold for more than you bought it for, you have a taxable capital gain.  If you sell for less you have a loss, but you cannot deduct the loss.  I'm not familiar with TaxAct, but you should be able to enter a code that says you were selling personal items and the software will automatically disallow the loss.

If the IRS uses a matching system they will be looking for the amount of the 1099-k to be reported even if the transaction did not result in income.  That said, I think you can probably get away with not reporting it and then just submitting the information about the cost basis in the unlikely event that you receive a notice; if you want to go that route. 

[awkwardpenguin]

Jan 27, 2022 10:52:31 GMT -5 jwright said:

Jan 27, 2022 10:41:58 GMT -5 awkwardpenguin said:

1099-Ks are actually just informational. A lot of tax software handles them incorrectly and assumes they are business income, because they usually are. However, a 1099-K for selling personal property at a loss is not taxable income, and therefore does not have to be reported at all.

1099-Ks are usually only generated for $20k in payments or over 100 transactions, but some states have a lower threshold for when they have to be sent. I'd guess you're in a state with a lower reporting threshold and that's why you got one.

Actually, the new federal law for 2021 is a threshold of $600 with no minimum number of transactions to file the 1099-K.  This was part of the American Rescue Plan Act.

To properly report this, you would report on Schedule D (not Schedule C) because the camera is a capital item.  If you sold for more than you bought it for, you have a taxable capital gain.  If you sell for less you have a loss, but you cannot deduct the loss.  I'm not familiar with TaxAct, but you should be able to enter a code that says you were selling personal items and the software will automatically disallow the loss.

If the IRS uses a matching system they will be looking for the amount of the 1099-k to be reported even if the transaction did not result in income.  That said, I think you can probably get away with not reporting it and then just submitting the information about the cost basis in the unlikely event that you receive a notice; if you want to go that route. 

Oh, I had no idea it had changed.  Thank you for the updated information.  I wonder if the Virginia FAQ is out of date.

Edited to add: Looks like the threshold change takes effect in 2022.

[jwright]

Jan 27, 2022 11:01:14 GMT -5 liteningme said:

Jan 27, 2022 10:52:31 GMT -5 jwright said:

Actually, the new federal law for 2021 is a threshold of $600 with no minimum number of transactions to file the 1099-K.  This was part of the American Rescue Plan Act.

To properly report this, you would report on Schedule D (not Schedule C) because the camera is a capital item.  If you sold for more than you bought it for, you have a taxable capital gain.  If you sell for less you have a loss, but you cannot deduct the loss.  I'm not familiar with TaxAct, but you should be able to enter a code that says you were selling personal items and the software will automatically disallow the loss.

If the IRS uses a matching system they will be looking for the amount of the 1099-k to be reported even if the transaction did not result in income.  That said, I think you can probably get away with not reporting it and then just submitting the information about the cost basis in the unlikely event that you receive a notice; if you want to go that route. 

In TaxAct it looks like Schedule D is "Capital gains and losses" and it prompts me to add a 1099 B.......not a 1099 K ? 

You are on the right track.  It sounds like TaxAct is over simplifying. You would enter as if it were a stock sale with the proceeds being whatever the 1099K says and the cost basis being what you paid for the camera.  You would check the box for not reported on 1099B.  Then there's usually some sort of drop down menu to indicate it is the sale of personal items.  

ETA:  Here are the IRS instructions to check against the output of TaxAct (Form 8949 is flows to Schedule D):
Report a transaction that results in a nondeductible loss in Part I or Part II of Form 8949 (depending on how long you held the property). Unless you received a Form 1099-B for the sale or exchange, check box C at the top of Part I or box F at the top of Part II of this Form 8949 (depending on how long you owned the property). Complete all columns. Because the loss isn't deductible, enter “L” in column (f). Enter the amount of the nondeductible loss as a positive number in column (g). Complete column (h). See the instructions for Form 8949, columns (f), (g), and (h).

[jwright]

Jan 27, 2022 11:12:19 GMT -5 liteningme said:

Jan 27, 2022 11:05:25 GMT -5 jwright said:

You are on the right track.  It sounds like TaxAct is over simplifying. You would enter as if it were a stock sale with the proceeds being whatever the 1099K says and the cost basis being what you paid for the camera.  You would check the box for not reported on 1099B.  Then there's usually some sort of drop down menu to indicate it is the sale of personal items.  

When I try it that way, it wants to refund some of my tax because it's a "loss" since the personal property cost more than we sold it for. That doesn't feel right. I don't see why we would be getting tax money back for selling a used camera. 

Right, it is a loss but a nondeductible loss.  That's why I'm suggesting looking for a code or drop down menu that tells TaxAct that this was a personal item.   You are supposed to enter Code L for nondeductible loss but I don't know the input in TaxAct to generate that. 

[ssmjlm]

This has been happening for a while in the B/S/T world. Turbo Tax has several ways to address, but none are as self employed, because it's not.

With it being sold as a loss, Turbo Tax has you add the value. Then add a 2nd line for the value in a negative. That zeroes it out.

The IRS is 20k people short and backlogged. Why they set a $600 limit is beyond me, but I got hit last year for re-selling kid clothes during the pandemic and some of my lilly dresses.

[jwright]

Jan 27, 2022 16:48:41 GMT -5 ssmjlm said:

This has been happening for a while in the B/S/T world. Turbo Tax has several ways to address, but none are as self employed, because it's not.

With it being sold as a loss, Turbo Tax has you add the value. Then add a 2nd line for the value in a negative. That zeroes it out.

The IRS is 20k people short and backlogged. Why they set a $600 limit is beyond me, but I got hit last year for re-selling kid clothes during the pandemic and some of my lilly dresses.

I think is saw those Turbo Tax instructions when I was trying to Google TaxAct. That work around they came up with is crazy but it would serve OP’s purposes.

You could even put it on Schedule C (or other income) with the amount on the 1099K as the revenue and then just make the cost of it equal to the revenue for a net of zero. It’s not technically correct but it will get the result of acknowledging the 1099 and not reporting any additional income or loss.

[aspentosh]

Thanks for that tip, ssmjlm. I also sell my DD's clothes and was going to get hit pretty hard with it this year. I wish I knew of a way to input the invoice into PayPal to show that it was sold at a loss when I resell it. I don't know if that makes sense or is even possible, though, because I am sure it would confuse the buyer.

[ssmjlm]

Jan 28, 2022 7:14:15 GMT -5 aspentosh said:

Thanks for that tip, ssmjlm. I also sell my DD's clothes and was going to get hit pretty hard with it this year. I wish I knew of a way to input the invoice into PayPal to show that it was sold at a loss when I resell it. I don't know if that makes sense or is even possible, though, because I am sure it would confuse the buyer.

Unfortunately I was going to do PP invoices so I could break out shipping, since that’s a decent piece of the price, but PP business invoices charge a higher %.