2023 is the year of the Form 1099-K
Confusion over new 1099-K reporting
Oh the rules, they are a-changing.
The American Rescue Plan of 2021 made a change to the threshold where a third-party settlement organization (TPSO) had to issue a 1099-K to someone who received money from the TPSO. The requirement for 2022 was that TPSOs would have to report transactions that totaled $600 or more. That requirement was delayed for one year.
Now we are in 2023 and that threshold is set at $600. How might that work? Pretend for a moment that I just sold my old bedroom set on Ebay for $950. Ebay would then issue me a 1099-K form showing that sale in early 2024. Will I be taxed by the IRS on that $950?
The answer depends on how much I originally paid for the bedroom set when I acquired it. If I paid less than $950 for the bedroom set, I’ve sold it at a gain. Specifically, it is a capital gain. The tax rate on a capital gain depends on how long I owned the property I sold. If I owned it for at least one year and one day, it is a long-term capital gain. If it was owned for less than a year and a day, it is a short-term capital gain.
If I paid $950 or more, I will not be taxed. But I cannot claim a loss on the sale of personal property against other capital gains. Confusing? Yes. Let’s make it simpler by adding the sale of another item. To illustrate this, I must confess to being a major fan of the Star Wars films. I cut class on 5/25/1977 in order to see what we now know as Star Wars IV on its opening day. In 1982 I acquired what is now a very rare t-shirt. The original title of Star Wars VI was “Revenge of the Jedi” until George Lucas concluded that a true Jedi Knight would never seek revenge. Most of the small amount of Revenge of the Jedi merch is long-gone and that which remains is very valuable. I saw an original Revenge of the Jedi t-shirt on sale recently for $850. I paid $10 for mine in 1982.
Now let’s blend these two sales. I paid $1,200 for that bedroom set. I sold it for $950. That’s a loss of $250. I paid $10 for the t-shirt and sold it for $850. That’s a capital gain of $840.
Now if these were stocks and not personal property, the loss and gain would net out to a capital gain of $840 - $250 = $690. But they are personal property and the loss on the bedroom set is not allowed to be claimed.
The IRS says that I must report the sale of the bedroom set on Schedule 1, Line 8z as $950 and the purchase price as $950 on Schedule 1, Line 24z. The words to accompany both of those entries should read “Personal Property Sold at a Loss” to avoid any confusion.
The gain on the sale of that t-shirt (which I will never sell, btw) is reported on Form 8949 with the transaction flowing from there to Schedule D.
Like it or not, many of us are going to be dealing with these forms. Those people who make jewelry, clothing and other items they sell on-line, along with people who buy and re-sell things online will be dealing with increased reporting requirements on their tax returns.
The reality is, the law requires that you must report all worldwide income and unless it is excludable from taxation, you are going to be taxed on that income; has not changed. This rule change is a more stringent reporting requirement dreamed up by Congress to attempt to generate more tax revenues from things that are not currently being reported.
Should you be taxed when you sell your personal property at a garage sale? Only if you sell any specific item for more than you paid for it. Which happens about as rarely as someone selling an original Revenge of the Jedi t-shirt.
Let’s go back to those people who are making their own products to sell online for a moment. If they are doing that with the intent to try and turn a profit, things change. That is potentially self-employment income, and you get to deduct all of the costs involved in making those products from their sale.
Where else might this come into play? I have a friend who is a season-ticket holder for a professional sports team. They go to the games they want to see and sell the other tickets online at a profit to reduce their expense of being season-ticket holders. Is that profit taxable income? Yes. Has it always been taxable income? Yes. Have they been reporting it as such? Since I don’t do that friend’s tax returns, I have no way of knowing. It isn’t any of my business. But these new rules make it much more likely that they will be taxed on those profits.
Is this a good or bad thing? That’s a matter of opinion. As a professional tax preparer, clients ask me if they have to put down income they received on their tax returns, if the income is not being reported to the IRS? My response is that is what the law says they must do.
Are these lowered thresholds “fair”? Fair is subjective and again, a matter of opinion. What I do know, or perhaps should say that I believe, is that the lowering of these thresholds will require taxpayers to put more effort into doing their taxes. It’s only fair that they know how to avoid being taxed on monies received that should NOT be taxed.
Oh the rules, they are a-changing.
The American Rescue Plan of 2021 made a change to the threshold where a third-party settlement organization (TPSO) had to issue a 1099-K to someone who received money from the TPSO. The requirement for 2022 was that TPSOs would have to report transactions that totaled $600 or more. That requirement was delayed for one year.
Now we are in 2023 and that threshold is set at $600. How might that work? Pretend for a moment that I just sold my old bedroom set on Ebay for $950. Ebay would then issue me a 1099-K form showing that sale in early 2024. Will I be taxed by the IRS on that $950?
The answer depends on how much I originally paid for the bedroom set when I acquired it. If I paid less than $950 for the bedroom set, I’ve sold it at a gain. Specifically, it is a capital gain. The tax rate on a capital gain depends on how long I owned the property I sold. If I owned it for at least one year and one day, it is a long-term capital gain. If it was owned for less than a year and a day, it is a short-term capital gain.
If I paid $950 or more, I will not be taxed. But I cannot claim a loss on the sale of personal property against other capital gains. Confusing? Yes. Let’s make it simpler by adding the sale of another item. To illustrate this, I must confess to being a major fan of the Star Wars films. I cut class on 5/25/1977 in order to see what we now know as Star Wars IV on its opening day. In 1982 I acquired what is now a very rare t-shirt. The original title of Star Wars VI was “Revenge of the Jedi” until George Lucas concluded that a true Jedi Knight would never seek revenge. Most of the small amount of Revenge of the Jedi merch is long-gone and that which remains is very valuable. I saw an original Revenge of the Jedi t-shirt on sale recently for $850. I paid $10 for mine in 1982.
Now let’s blend these two sales. I paid $1,200 for that bedroom set. I sold it for $950. That’s a loss of $250. I paid $10 for the t-shirt and sold it for $850. That’s a capital gain of $840.
Now if these were stocks and not personal property, the loss and gain would net out to a capital gain of $840 - $250 = $690. But they are personal property and the loss on the bedroom set is not allowed to be claimed.
The IRS says that I must report the sale of the bedroom set on Schedule 1, Line 8z as $950 and the purchase price as $950 on Schedule 1, Line 24z. The words to accompany both of those entries should read “Personal Property Sold at a Loss” to avoid any confusion.
The gain on the sale of that t-shirt (which I will never sell, btw) is reported on Form 8949 with the transaction flowing from there to Schedule D.
Like it or not, many of us are going to be dealing with these forms. Those people who make jewelry, clothing and other items they sell on-line, along with people who buy and re-sell things online will be dealing with increased reporting requirements on their tax returns.
The reality is, the law requires that you must report all worldwide income and unless it is excludable from taxation, you are going to be taxed on that income; has not changed. This rule change is a more stringent reporting requirement dreamed up by Congress to attempt to generate more tax revenues from things that are not currently being reported.
Should you be taxed when you sell your personal property at a garage sale? Only if you sell any specific item for more than you paid for it. Which happens about as rarely as someone selling an original Revenge of the Jedi t-shirt.
Let’s go back to those people who are making their own products to sell online for a moment. If they are doing that with the intent to try and turn a profit, things change. That is potentially self-employment income, and you get to deduct all of the costs involved in making those products from their sale.
Where else might this come into play? I have a friend who is a season-ticket holder for a professional sports team. They go to the games they want to see and sell the other tickets online at a profit to reduce their expense of being season-ticket holders. Is that profit taxable income? Yes. Has it always been taxable income? Yes. Have they been reporting it as such? Since I don’t do that friend’s tax returns, I have no way of knowing. It isn’t any of my business. But these new rules make it much more likely that they will be taxed on those profits.
Is this a good or bad thing? That’s a matter of opinion. As a professional tax preparer, clients ask me if they have to put down income they received on their tax returns, if the income is not being reported to the IRS? My response is that is what the law says they must do.
Are these lowered thresholds “fair”? Fair is subjective and again, a matter of opinion. What I do know, or perhaps should say that I believe, is that the lowering of these thresholds will require taxpayers to put more effort into doing their taxes. It’s only fair that they know how to avoid being taxed on monies received that should NOT be taxed.
posted by me at 11:13 AM
