New tax rules and definition of "profit".

[swapij]

I've been reading over the new tax policy and the only relevant thing I've found is this: 

• "No need to worry— you only pay taxes on profits. You won’t owe any taxes on something you sell for less than what you paid for it. For example, if you bought a bike for $1,000 last year and then sold it on eBay today for $700, that $700 you made would generally not be subject to income tax."

My question is - how do we sellers prove what we've gained or lost without having a receipt for everything we've ever bought? Hypothetically, let's say I bought a vintage AT-AT in 1981 and paid $40  - about $135 in today's money. I sell it used in 2022 for $165 BUT I offer free shipping, about $20.  Then ebay takes it's 10%.  In the end I'm technically about $5 in the red. 

Does ebay simply report I sold something for $165? Without my receipt from 1981, or submitting my $20 receipt from the PO, etc. how then does it make any sense to spend so much time cleaning out one's closets just to get dinged on the taxes when you might not really be making any profit at all?

[wooden_flower]

Your 1099k reflects the amount of the payment from the buyer. The rest is up to you to calculate.  You can deduct your selling costs and actual shipping costs, as well as the item cost.  Lots of sellers are going to have to estimate item costs - be reasonable and be consistent. Find a method and use the same method for everything.

If you only know that an item costs $135 today, and you bought it 20 years ago, then start with the $135 and back off the 20 years of inflation to get to your estimated cost. That is a reasonable method for estimating costs, except on electronics, where prices generally decrease over time. If you know you paid $40 for it, then use that.

If you are closet cleaning, you probably are not going to make a profit, and so you would have no taxable income.  You still have to show the IRS how you got to that answer. Using the same cost estimating method, my favorite jeans that cost $50 today probably cost $45 5 years ago when I bought them. I sell them for $25, no profit. I can't deduct the loss from my taxable income unless I am a business filing on schedule C.

[mega-ma-roo]

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@swapij wrote:

I've been reading over the new tax policy and the only relevant thing I've found is this: 

• "No need to worry— you only pay taxes on profits. You won’t owe any taxes on something you sell for less than what you paid for it. For example, if you bought a bike for $1,000 last year and then sold it on eBay today for $700, that $700 you made would generally not be subject to income tax."

My question is - how do we sellers prove what we've gained or lost without having a receipt for everything we've ever bought?

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It's known as the Cohan rule, Cohan Rule | Wex | US Law | LII / Legal Information Institute (cornell.edu):

Cohan rule is a that has roots in the common law. Under the Cohan Rule taxpayers, when unable to produce records of actual expenditures, may rely on reasonable estimates provided there is some factual basis for it. The rule allows taxpayers to claim certain tax deductions on the basis of such estimates.

It's a two-prong test: you need some factual basis and the estimate must be reasonable. If you should get audited, it will be up to you to meet the tests. Contrary to popular opinion, the IRS is generally also reasonable in accepting these deductions but of course your mileage may vary.

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Hypothetically, let's say I bought a vintage AT-AT in 1981 and paid $40  - about $135 in today's money. I sell it used in 2022 for $165 BUT I offer free shipping, about $20.  Then ebay takes it's 10%.  In the end I'm technically about $5 in the red. 

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Using your numbers this is what would go on your Schedule C:

Line 1 - Gross receipts or sales: $165  

Line 4 - Cost of goods sold: $40

Line 10 - Commissions and Fees: $16.50 (if eBay took only 10%, we wish)

Line 18 - Office Expenses: $20

Line 28 - Total Expenses: $76.50

Line 31 - Net Profit: $88.50 

You'd probably have other expenses for boxes, tape, etc. so this is just an example.

Does ebay simply report I sold something for $165? 

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If your gross receipts in 2022 are over $600 eBay will report that number to the IRS. This will include the total amounts buyers paid minus the sales taxes collected by eBay. See here: Form 1099-K | eBay

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Without my receipt from 1981, or submitting my $20 receipt from the PO, etc. how then does it make any sense to spend so much time cleaning out one's closets just to get dinged on the taxes when you might not really be making any profit at all?

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That's something every seller will need to decide for themselves.

[swapij]

So it really makes no sense whatsoever to sell anything on ebay unless it's a higher-end item, because who wants to be calculating the costs, deflation, inflation, expenses, etc. on  $5 trinkets you find in your junk drawers? I've always hated tossing that stuff, simply from an  environmental perspective, but now it seems foolish not to. Even if a person decided to combine a bunch of low-priced items into a lot, the idea of trying to compile a list of POSSIBLE costs on stuff ("Hmmm, I bought that R2-D2 keychain for probably less than $5, but NOW it's worth $10, and if I spend the next couple hours making a spreadsheet of guesstimated expenses/profits for all the other junk I sold for $20...) Uhg.

I thought there was some law that covered garage-sale type sales ,tax-wise? As far as I'm aware, people never report that income, unless they're Ned Flanders.

[swapij]

I guess inflation/ deflation doesn't account for anything, then? $40 forty years ago was a lot more money then than it is today.

[gosimus]

@swapij 

< $40 forty years ago was a lot more money then >    

I googled what is today's equivalent of $40 in 1982 to use an online inflation calculator.  The answer was that it takes $110.84 today to have the buying power that $40 had forty years ago.  Different inflation calculators had varying values, but they were all in the ball park.  If anybody wants to check my figures, make sure you're looking at a recent answer and not an archived answer. 

[kensgiftshop]

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@swapij wrote:

My question is - how do we sellers prove what we've gained or lost without having a receipt for everything we've ever bought?

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How have you done it in the past?

[rfmtm · Accepted solution]

Yes, there is sort of a garage sale rule for those selling personal items not for profit.

Currently the IRS is allowing a simplified way to do this when just selling personal or garage sale items not for profit or as a business or hobby. You report the total amount as Misc/Other Income. You then can post an Adjustment up to that total amount to offset that income (note you can not take any losses). This results in a wash (zero profit), you will owe no taxes, and the IRS will be happy that you accounted for your ebay income whether you get a 1099 or not. 

Any accountant or tax software can guide you through this.

[swapij]

BUT, since ebay will send a 1099 if you make over $600, will this rule/ exemption still apply?

[rfmtm]

Yes, your enter it on its own line as "ebay 1099K sales" as a misc income amount and then that amount again as a negative as "ebay sales costs" to offset it.

Misc/Other Income

1.  Garage Sales                       $100.

2. Ebay 1099 Sales                  $800.

3. etc.................                          $.........

4. Garage Sales Costs        ($100.)

5. Ebay Sales Costs              ($800.)

6. etc.................                        ($.........)

Total Misc/Other Income   $0.

[mega-ma-roo]

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@rfmtm wrote:

Yes, your enter it on its own line as "ebay 1099K sales" as a misc income amount and then that amount again as a negative as "ebay sales costs" to offset it.

Misc/Other Income

1.  Garage Sales                       $100.

2. Ebay 1099 Sales                  $800.

3. etc.................                          $.........

4. Garage Sales Costs        ($100.)

5. Ebay Sales Costs              ($800.)

6. etc.................                        ($.........)

Total Misc/Other Income   $0.

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I just want to point out that in the OP's example, he paid $40 and the gross receipts reported by eBay would be $165.  This results in taxable income of $125 for his example using this method.

[swapij]

Right, but again that doesn't really account for inflation, but I don't know that the IRS cares. Seems like it still leave one with the potential problem of having to justify losses if you get audited, unless you can throw down the "Garage Sale Clause" card, which probably has an official name?

[rfmtm]

I assume OP has other items to put into the total.  However, if in the end there is a profit, then yes, there may be tax due.  Also if a lot of profitable items, it would be better reported as Capitol Gains on Schedule D.

[mega-ma-roo]

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@swapij wrote:

Right, but again that doesn't really account for inflation, but I don't know that the IRS cares. Seems like it still leave one with the potential problem of having to justify losses if you get audited, unless you can throw down the "Garage Sale Clause" card, which probably has an official name?

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Inflation has nothing to do with it. It's what you paid and what you received, that's it. There is no "Garage Sale Clause". As far as the IRS is concerned you're either a business or you're not.

If you're not a business, you use the method @rfmtm discussed (or report your income as a capital gain, but that's another discussion). You can only adjust your income for the cost of goods sold and only up to the amount of income received. You cannot claim losses to income using this method.

If you are a business, you use Schedule C and can adjust your income for cost of goods sold and other expenses. You can claim losses to income using this method if your expenses are greater than your receipts.

[wooden_flower]

"Inflation has nothing to do with it. It's what you paid and what you received, that's it."

Inflation can be used if I you no idea what you paid for an item x years ago, but the item can still be purchased today.  A reasonable basic for estimate would be today's cost new, less x years of inflation.  So if my fav jeans are $50 today, I probably paid $45 for them 5 years ago, assuming 2% annual inflation.  If you know your cost 5 years ago, of course you use that. 🙂

As you so eloquently stated, "Under the Cohan Rule taxpayers, when unable to produce records of actual expenditures, may rely on reasonable estimates provided there is some factual basis for it. The rule allows taxpayers to claim certain tax deductions on the basis of such estimates."