It will be harder not to tell the IRS that it is making income from online sales. Here’s what to know
All the money you make selling stuff online? Don’t overlook the tax officer.
Depending on your situation, it is possible that you will generate income that the IRS would like to know about. And if you’re an ongoing seller, be aware that after that year it can get harder to avoid income reporting requirements.
While the tax law governing such transactions hasn’t changed, it has only become more visible, said Cari Weston, director of tax practice and ethics at the American Institute of CPAs.
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Under current rules, people who sell goods or services through platforms such as Uber, Ebay, Etsy, and others that use third-party transaction networks (i.e. PayPal) will generally only receive a tax form if they have at least 200 transactions totaling 20,000 USD carry out or more. This form, called 1099-K, also goes to the IRS.
Beginning next year, the federal threshold for issuing the 1099-K will drop to $ 600 based on a provision in the recently enacted American Rescue Plan Act with no minimum transaction level. (Some states already have lower minimums.)
This means that in early 2023 you could get a 1099-K for any online sales you make in 2022. It does whether you’re a casual seller or a business, as long as you’ve sold more than $ 600 in value on a single platform. This doesn’t necessarily mean that you will be taxed on the money, but you would need to take this into account on your tax return.
Ebay is one of the platforms that would be affected by the new reporting rule, and the company is working with lawmakers to resolve potential issues.
“EBay believes in compliance with the law and proper tax accounting,” said an eBay spokesman. “However, sending confusing 1099-Ks to almost every casual or casual seller using an online platform to generate additional income is not the right approach.”
Additionally, issuing a 1099-K requires a social security number, which has led some of the affected companies to fear that it could deter sellers, said Garrett Watson, senior policy analyst at the Tax Foundation. Not all of these platforms routinely collect this information.
However, due to the current high threshold for the 1099-K, even sellers with a clear profit motive may not receive the form – which is also not the IRS, which can lead to underreporting of income.
“A good chunk of people on these platforms may not report income, and neither does the IRS get that information,” Watson said.
According to a 2019 IRS report that examined data for 2011, 2012, and 2013, the tax gap – the difference between taxpayers’ debts and their payments – was an estimated $ 381 billion per year.
Regardless of whether or not you receive a tax form, there are instances when the income you make from your online sales should be reported to the IRS.
Here you can find out which tax rules apply.
What is taxable?
When your sales are like a flea market – that is, you dump your stuff for less than what you originally paid for – there’s usually no need to report what you’ve confiscated, said Weston, of the American Institute of CPAs. In essence, there is no “income” to report.
For example, of those who sold second-hand goods on Ebay, 85% picked items from their home – things they already owned and which, according to a recent report from Ebay, they no longer used.
Otherwise, the taxation depends on the situation.
A good chunk of people on these platforms may not report income, and neither will the IRS receive this information.
Senior Policy Analyst at the Tax Foundation
In general, if you are selling for reasons other than promoting a hobby in order to make a profit, you are likely to be considered a business owner for tax purposes. For example, if you regularly buy clothes from yard sales (or other discounted places) and sell them – whether online or not – with the intention of making a profit, this counts.
The good news is that as a business owner, you can deduct your expenses from the money you make. And if those costs exceed your business income in a given year, you can deduct the resulting loss from other income you declare on your tax return, Weston said.
The IRS expects to hear from anyone whose net self-employment income is $ 400 or more. And although you would have to pay a 15.3% self-employment tax, you can deduct half of that amount elsewhere when you return.
The IRS also wants to know about the income you get from a hobby. In contrast to business losses, taxpayers can usually only deduct the costs incurred up to the amount of the hobby income. In other words, the excess (loss) cannot be deducted from other income.
“However, since this is a hobby and not a business, you don’t have to pay self-employment tax on income,” Weston said.
It can be difficult at times to figure out if you are selling as a hobby or as a business. The IRS has some tips on its website to help taxpayers make a decision.
In the meantime, sometimes an affiliation is more valuable when you sell it than when you acquired it, whether through a purchase or a gift. Your profit is generally the difference between your cost base – its value when it came into your possession – and what you sell it for.
In these one-off cases, the profit would be treated as a capital gain. In general, this means that it will be taxed either as ordinary income if you have held the asset (item) for less than a year, or as long-term gain at a tax rate of 0%, 15% or 20% depending on your total income .
There are exceptions to these rates, however, including the 28% used for profits from the sale of things like fine arts, collectibles, antiques, stamps, coins, and some jewelry, Weston said.