OT: IRS Paypal Tax Situation

[khkco4bls]

Here's my question if I bought everything in my collection at antique shows Brimfield other locations you normally just pay cash a lot of times and don't have receipts but what happens when you sell your whole collection at auction do you pay taxes on the difference of what you paid to what you sold it for

[Head928]

I got a bill for 14K from 2014's return this year.

Basically I had to amend my 14 return with a detailed schedule C showing purchases as well. Ended up not owing anything.

[MikeGarcia]

They are assuming you had a 22K profit , ;they are relying only on what Paypal has documented that you are on record as receiving.
..you and your guy have to address the 22K "profit" ; hire someone who really really knows the codes........it may turn out that as it often does , you actually and truly have a loss . Don't expect a refund though. Isn't this a fun hobby ? Please keep us posted ; we're all in this particular boat together. Godspeed.Vaya Con Dios.

..

[D. Bergin]

I never understood why 1099's go through Paypal and not Ebay. Paypal is essentially a glorified checking account. A place for money to come in and go out of. Not a source of "income".

As it is, I just report my Paypal 1099, claim all my deductions and expenses and pay my taxes accordingly.

[Exhibitman]

Paypal is treated like a bank, Dave. They collect and disburse funds, so they are deemed to be knowledgeable about where the money goes. eBay doesn't have that same role now that it spun off PayPal. When PayPal was a subsidiary of eBay, of course, it was in effect eBay that was issuing the 1099.

[CMIZ5290]

I'm an idiot pertaining these discussions. Is their any benefit taking a check versus Paypal friends?

[MikeGarcia]

Originally Posted by CMIZ5290

I'm an idiot pertaining these discussions. Is their any benefit taking a check versus Paypal friends?

..a check or money order won't rat you out to the federales.....

..

[BobC]

I've been doing taxes for almost 40 years and have a client that sells on Ebay, so I know what you got yourself into. You neglected to report the results of your online selling activity through Paypal, which obviously sent information about your activity into the IRS for 2014. You should have received a copy of this 1099 form sent from Paypal also. The IRS threshold for having Paypal report to them on an individual is that they have at least $20,000.00 of receipts, and at least 200 transactions, for a calendar year. The person who suggested you may have to determine if your are dealer or just selling collectibles/investments can forget that, at that volume you are most likely going to be considered a dealer by the IRS, trust me. As such, if your business isn't incorporated or set up as some type of Limited Liability Company, you're supposed to file a Schedule C as part of your federal tax return and report your sales activity for the year. In other words, you treat it as a sole proprietorship. Obviously to report this you'd start with your gross receipts or sales, and then list your allowable deductions, to finally determine your net taxable income for the year.

As some others mentioned, there are various expenses you can claim and use to reduce your taxable income, such as Paypal or Ebay fees, postage costs and shipping materials, etc. You're probably ignoring the biggest expenditure of all though, which is most likely your Cost of Goods Sold (COGS). Yes, you're supposed to keep track of the costs you incurred to acquire everything you sold. and then only deduct the actual cost of each item sold against the sale price you received for it. You can't just say that you bought $30,000 in cards during the year and only sold cards for $25,000, and claim you had no income and instead, a $5,000 loss. It doesn't work that way. Any item you buy and hold, as a dealer, basically becomes an asset of the business knows as inventory. You hold the value for each business inventory item purchased as an asset until you sell it. It is only then that you report the sales price as income and offset it by the cost you originally incurred to acquire the item sold.

The IRS doesn't know anything about what you do, other than the fact they got a 1099 form from Paypal showing you had gross receipts of a certain amount. Since you didn't report this income on the tax return nor show any expenses against it, the IRS can only assume you had no deductible expenses and went ahead and recalculated your return based on what they know. The letter they sent, and the amount shown as due on it, were sent for one main reason.......to get your attention, which they obviously did. You need to go back and try to figure out all your expenses from that year related to your card selling, including your COGS, and come up with your net taxable income.

And to add insult to injury, assuming that you are actually handing the sales and work yourself, you are actively involved in the business and not only is the net income going to be subject to ordinary income tax rates but, it is also probably going to be subject to self-employment tax (social security and Medicare) of upwards of 15.3% on top of of the income taxes.

The best thing for you to do is go back and star putting together all the data you can to try and figure out what expenses you may have. The IRS already knows your gross income based on the report they got from Paypal. Determining what your COGS sold is could be tricky if you don't keep decent records. And then in determining your other costs you want to try to include as much legitimate expense as possible. Don't forget things like mileage to drive to the post office, internet access costs and fees, possibly a home office deduction if you have an exclusive area of your home you us for the business, and so on. if you are not very experienced with the IRS or the rules, you probably should look for some expert advice. Once you think you have all that, you should write back to the IRS and explain that you have expenses to be deducted against the income reported to you from Paypal. You want to list everything out as best you can and include any supporting documents in your response. Once you've come up with what you believe is your true net income, ask the IRS to review your account and if need be, recalculate what you owe them. At that point you wait to hear their response back.

You should be able to bring the IRS calculated tax due way down but, don't be surprised if you do end up with a balance still due. And of course then they can also tack on interest and penalty charges for not originally reporting the income and paying the tax late. Good luck.

BobC

[D.P.Johnson]

Interesting thread.

[vthobby]

Originally Posted by BobC

I've been doing taxes for almost 40 years and have a client that sells on Ebay, so I know what you got yourself into. You neglected to report the results of your online selling activity through Paypal, which obviously sent information about your activity into the IRS for 2014. You should have received a copy of this 1099 form sent from Paypal also. The IRS threshold for having Paypal report to them on an individual is that they have at least $20,000.00 of receipts, and at least 200 transactions, for a calendar year. The person who suggested you may have to determine if your are dealer or just selling collectibles/investments can forget that, at that volume you are most likely going to be considered a dealer by the IRS, trust me. As such, if your business isn't incorporated or set up as some type of Limited Liability Company, you're supposed to file a Schedule C as part of your federal tax return and report your sales activity for the year.
BobC

Bob,
I just read your post and this got me wondering if you might be overlooking another fairly simple Course of Action. If the items that he sold via paypal in 2014 were actually purchased a certain time ago (is it more than a year?) for this problem lets just say that his stuff was purchased in 2011-2012, can't he simply fill out a Schedule D and not worry about CoGS and begginning inv/end inv etc...??

I am anxious for your answer as it seems to me this would be ok if he held those assets for a long time (sorry not exactly sure if it a year or more?) Please advise, thanks!

Peace, Mike

[ValKehl]

Mike, it is my understanding that a card dealer is required to report using Schedule C ( which is used to report the results of a business), whereas a card collector is required to report using Schedule D. How long ago the cards were acquired prior to their sale is irrelevant in either case. If I remember correctly (my "CRS" disease gets worse every year!), one major difference exists with respect to cards sold at a loss; such losses are offset against cards sold at a profit by a dealer, but not so by a collector.
Val

[BobC]

Originally Posted by vtgmsc

Bob,
I just read your post and this got me wondering if you might be overlooking another fairly simple Course of Action. If the items that he sold via paypal in 2014 were actually purchased a certain time ago (is it more than a year?) for this problem lets just say that his stuff was purchased in 2011-2012, can't he simply fill out a Schedule D and not worry about CoGS and begginning inv/end inv etc...??

I am anxious for your answer as it seems to me this would be ok if he held those assets for a long time (sorry not exactly sure if it a year or more?) Please advise, thanks!

Peace, Mike

I understand your question but, I kind of addressed this already when I mentioned how many dollars and how many transactions you have to have before Paypal is required to report your receipts to the IRS. At a minimum of $20,000 a year and 200+ transactions, that sounds a little bit more than just a casual collector who can take advantage of treating his sales as investments subject to capital gains taxes and not just ordinary income tax rates. Even so, you have to remember that unlike long term capital gains on the sale of regular investments like stock or bonds, those have a maximum capital gain tax rate of 20% under current law, regardless of what the taxpayer's income is. Collectibles have a higher potential capital gains rate of of up to 28%, even if held more than 12 months.

BobC

[BobC]

Originally Posted by vtgmsc

Bob,
I just read your post and this got me wondering if you might be overlooking another fairly simple Course of Action. If the items that he sold via paypal in 2014 were actually purchased a certain time ago (is it more than a year?) for this problem lets just say that his stuff was purchased in 2011-2012, can't he simply fill out a Schedule D and not worry about CoGS and begginning inv/end inv etc...??

I am anxious for your answer as it seems to me this would be ok if he held those assets for a long time (sorry not exactly sure if it a year or more?) Please advise, thanks!

Peace, Mike

Let me add a little more to this regarding the holding period of the assets you also asked about. If the person is in the business of selling cards, there is no capital gain or collectible treatment you can get tax-wise. You're in business and the cards you bought are inventory, period. Doesn't matter if you hold them two months or two years, when you sell them, the profit you make on the sale over what you paid for them is considered ordinary income. Now you also get the benefit of being able to deduct other expenses for the operation of your business, like postage, advertising, etc. A collector who buys and sells occasionally just for investment purposes is not in business and doesn't get to write off expenses. What he/she pays for the card is their basis in it till they sell it, give it away or otherwise dispose of it. For example, if I'm a card dealer and you call and tell me you have a killer collection you want to look at for possible purchase, and I fly out to see you and look at it, my cost of travel to come and see you is a business expense I could write off for tax purposes. If I'm just a true collector and investor, that travel expense is not tax deductible. See the difference? There's pros and cons going both ways.

Also, if you are in business and then stop and get out of it, there's nothing that says you can't take your former inventory and convert it to collectibles that you own personally. You'd want to give it some serious time from when you last transacted business as a card dealer though till when you tried to sell something and claim it as a collectible subject to cap gain treatment. You'd also have to watch out for what kind of business entity you may have held the assets in. Putting items into a corporation can have different results when you take them out as opposed to running your business as a sole proprietorship or even an LLC treated as a partnership or disregarded entity. Now you're getting into areas that start to get a little too technical and you begin to overthink these things. trying to keep it general and simple.

BobC

BobC

[glchen]

Originally Posted by khkco4bls

Here's my question if I bought everything in my collection at antique shows Brimfield other locations you normally just pay cash a lot of times and don't have receipts but what happens when you sell your whole collection at auction do you pay taxes on the difference of what you paid to what you sold it for

You'd have to discuss that with the IRS or your tax accountant. If you don't have any receipts (or something similar) to verify the purchase price of your items, technically, the IRS can say that you picked up those items for free, and the entire amount that you sold the item for is your profit and taxable.

[Exhibitman]

Bob's take on what the IRS does is exactly correct; they compare paperwork from different sources and flag discrepancies. The letter is just an inquiry, not a final decision. You may need to amend your return to cover it. If your tax preparer had the 1099 and messed up they should amend for free and cover the penalties and interest, if any. If you didn't give the 1099 to the preparer, the cost and interest and any penalties are on you: garbage in, garbage out.

I think the IRS is doing more of this sort of paperwork inquiry/assessment than ever before for individual taxpayers. I got one from the IRS for a recent tax year because the IRS didn't have a W2 and W3 for me but had my 1040 showing the income. I got a letter proposing a drastic increase in my taxes because the IRS assumed that my entire salary was untaxed when I'd actually been fully withheld and paid in. I got it straightened out eventually and the IRS rescinded the entire proposed assessment. Scared the heck out of my wife but having handled disputes with the IRS for clients, I understood the nature of the inquiry and how to straighten it out.

In other words, don't panic.

You may want to look at this page on the IRS web site, which explains the rules on capital gains taxation of collectibles:

https://www.irs.gov/taxtopics/tc409.html

[BobC]

Originally Posted by Exhibitman

Bob's take on what the IRS does is exactly correct; they compare paperwork from different sources and flag discrepancies. The letter is just an inquiry, not a final decision. You may need to amend your return to cover it. If your tax preparer had the 1099 and messed up they should amend for free and cover the penalties and interest, if any. If you didn't give the 1099 to the preparer, the cost and interest and any penalties are on you: garbage in, garbage out.

I think the IRS is doing more of this sort of paperwork inquiry/assessment than ever before for individual taxpayers. I got one from the IRS for a recent tax year because the IRS didn't have a W2 and W3 for me but had my 1040 showing the income. I got a letter proposing a drastic increase in my taxes because the IRS assumed that my entire salary was untaxed when I'd actually been fully withheld and paid in. I got it straightened out eventually and the IRS rescinded the entire proposed assessment. Scared the heck out of my wife but having handled disputes with the IRS for clients, I understood the nature of the inquiry and how to straighten it out.

In other words, don't panic.

You may want to look at this page on the IRS web site, which explains the rules on capital gains taxation of collectibles:

https://www.irs.gov/taxtopics/tc409.html

Adam,

It's not that the IRS is doing more of this. They have always gone back and confirmed and checked everyone's tax return against all the W-2s and 1099s they receive on every taxpayer. This includes things like broker statements showing your proceeds from the sales of stock and even those statements from people having HSA accounts that take out distributions to make medical payments. If you miss those and don't pick them up on your return, it may take a year or two even but, the IRS will eventually match up those information forms they got with what is on your tax return. If they can't see that the appropriate amount is being picked up on your tax return where they expect it to be, their system will generate one of the "love letters" everyone just waits to get from the IRS. Now if what is missing or off doesn't change the tax liability due, they won't send the letter. Also, if they don't see where the reported amount is missing, they also will not send a letter. For example, the OP said he sold items using Paypal I believe. IRS got that information from Paypal and looked to see those sales receipts being reported on his tax return. Now let's say the OP had revenue from both Paypal and other sources, like cash paid to him at shows. Maybe when he filed his return he picked up and actually reported the cash payments he received but, forgot to add in the Paypal receipts. As long as the cash payments he reported on his return equal or exceed the amount Paypal reported, the IRS will leave him alone. They just assume the sales revenue he reported goes back against the Paypal info and don't realize he's under reported his income. The IRS is not that sophisticated and tries to automate everything so it is mostly done by machines and not humans. How do you think we end up hearing about how many billions of dollars each year they pay out in fake refunds?

BobC

[yanks12025]

I just want to Make sure, so you only get tax papers if you do over $20,000 and 200 transactions?

[bxb]

Originally Posted by yanks12025

I just want to Make sure, so you only get tax papers if you do over $20,000 and 200 transactions?

Correct, must meet BOTH criteria.

[birdman42]

Originally Posted by bxb

Correct, must meet BOTH criteria.

Important as a collector to track these 2 parameters during the calendar year and consider shutting down your ebay transactions if both are getting close to the annual limit.

Well, I suppose if your intent is to not report the income.

Bill

[birdman42]

Originally Posted by yanks12025

I just want to Make sure, so you only get tax papers if you do over $20,000 and 200 transactions?

To clarify the discussion here (or maybe muddy it), there are lots of different "1099" forms. There's 1099-INT used to report interest income, 1099-DIV for dividends, etc. The 1099 of interest here is the 1099-K used to report credit card transactions. (Another in the 1099 series is the 1099-MISC. That's the form that's issued for contractor work, rental income, etc.)

PayPal will issue you a 1099-K, not a -MISC. Here's the threshold for issuing the document, quoting from the IRS instructions for the form:

Exception for de minimis payments. A TPSO [third-party settlement organization; that's PayPal] is required to report any information concerning third party network transactions of any participating payee only if for the calendar year:
The gross amount of total reportable payment transactions exceeds $20,000,
and
The total number of such transactions exceeds 200.

However, I've seen 1099-Ks issued to people who were under that threshold. Uber and AirBnB, for example, send the doc to anyone who has any payment run through them.

The amount on the 1099-K shows the gross amount of the transactions. It's up to you to keep track of any fees.

As has been stated earlier, it's your responsibility to report all your income, from whatever source. Even if the money comes to you as cash or check, it's still reportable income.

Bill