Today’s article comes from Johnny Goodman, the sports columnist at The Soap Boxers. While he is a fan of many sports, his passion is golf. Johnny is a recognized authority on vintage golf cards, and his writing has been featured in the print edition of Sports Market Report.

Paypal’s ratting us out to the IRS!

This year there are many sports card collectors receiving an unwelcome email from Paypal – informing them that they have met the guidelines to receive a form 1099-K. This has been a hot topic on many message boards. Most of these collectors do not really sell items to make a profit, but they buy and sell items and then use any of those funds to purchase new or better items for their own collection, and then sell off the older or less valuable items to supplement their purchases. In the minds of these folks they are not running any sort of a business, they are just increasing their collections and enjoying their hobby.

The IRS views this as the person is under-reporting their income, hence the 1099-K reporting form.

I am not a person that sells enough stuff that I am anywhere close to this mark, but I am certain a few people may have “accidentally” met these thresholds – primarily by not knowing the IRS guidelines.

Some will argue it is the right thing to do to make sure people all are reporting their income. Others will argue that it is just another case of keeping the man down.

At the end of the day, I feel that the IRS was really trying to target the people that only sell on line, and where thereby not reporting all of their taxable income to the IRS. But in the end, there are a myriad of collectors in various lines of collectibles that have no profit motive to their buying and selling that are also getting snared in the net of using PayPal and Ebay.

Form 1099-K

Back in 2010, the IRS passed a law affecting people who conduct business online. If you are a person that does a LOT of selling online you were probably aware of this change in tax code. It applies to sellers that do $20,000 in sales in a calendar year and do at least 200 or more transactions. If you are a person that meets BOTH of these criteria, you will be receiving a Form 1099-K from PayPal.

When this change originally was announced, the IRS solicited feedback before making its final ruling. Many in the Ebay community suggested that the gross amount should be defined as “Net Sales” taking into account chargebacks, the fees taken out by Ebay and PayPal and other adjustments on the ideology that the gross amount is not a true indicator of revenue.

The IRS decided that the gross amount will be the amount reported. The gross amount is defined as the “total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts.”

Does This Affect Me?

If you are asking this question, the fact is that it is already likely too late and you may have some reporting to do.

Many folks use Ebay and similar sites as a way to sell unwanted or used household items. Much like a large on-line garage sale.

If this is your stance you are likely nowhere near the thresholds for the $20,000 in annual sales. It is not in the interest of the IRS (at least at this point) to try and track down what they would refer to as the “small-guy”

If you are a full-fledged business that also uses online sites as a way to generate income in addition to your brick and mortar storefront, then you likely have an Employer Identification Number, already are aware of the tax ramifications of selling and making a profit as you have used sites such as Ebay to further your marketplace and increase your sales.

How can I minimize my tax liability?

Here are some tips to minimize your tax liability:

• First of all, I’d caution against trying to circumvent this rule by opening Paypal accounts in the names of your wife, six month old daughter, and dog, especially if you are conducting all of the business. The IRS tends to frown on people who skirt the rules.
• The most important thing you can do is keep good records. Get an itemized receipt any time you buy an item. This allows you to establish a cost basis (often referred to simply as “basis”) for the items, as well as the holding period to determine if a gain is a short term capital gain (held less than one year, taxed as ordinary income) or long term capital gains (taxed at the capital gains rate).
• If you don’t have any documentation of your cost basis, the IRS can simply deem that your basis is zero, meaning that the entire gross price is profit.
• You should also track any expenses related to the transactions, such as Paypal fees and chargebacks. These costs can be deducted.
• Finally, if you make a significant amount of money from your “hobby” on a consistent basis, you may want to resign yourself to the fact that you’re actually running a business. There’s one big distinction regarding the tax treatment of a hobby versus a business. Business losses are deductible, while hobby losses are not.
• If you decide to turn your hobby into a business, you’ll want to exercise some caution. Decide which portion of your collection belongs to you and which portion will belong to the business. Create an itemized list, since this is a capital contribution to the business. Take care to not co-mingle assets, and any time items are transferred from one party to the other, document the fact that the transaction was an arms-length transaction at the fair market value. Sorry, you can’t buy that 1952 Topps Mickey Mantle from your business for a dollar and then write off a big loss. Track other expenses and keep the receipt.
• One final tip. Unless you want to run afoul of another tax authority, look up the rules regarding sales tax in your state, county, and city. If your transactions will be subject to sales tax, you’ll want to apply for a retail tax certificate (which allows you to collect sales tax and remit it to the state) and a sales tax exemption certificate (which allows you to purchase items for resale tax-free).