Just broke 20K in sales, some questions about gains/loses

[sir_vidiot]

I just broke 20K in sales so i assume I will get a 1099K.  Sorry if these are dumb questions.

Gaming is my life long hobby so 95% of my ebay sales are games (new and used) as I have a giant collections from the 80's onward.

1.   About 7K is actual profit (13K is expenses.  I buy a ton of games that go into a backlog to be played later).   So 7k will be considered capital gains?

2.   If they are considered gains,   can I sell items for losses to cancel the gains like stocks ?

Example

I have 3 copies of game X that I bought for $20 each.

I sell 2 copies for $40 (lets say $20 profit (forget fees/taxes for simplicity) $40 total profit

The game price tanks and I sell the 3rd copy in the same year for $5 ($15 loss), can I use that $15 as a loss?

Thanks

[golfingaddict]

Look for schedule C on the IRS website.

Income

minus

expenses

And you need to claim them even if you do not hit 20K

Better yet, find a good tax accountant or CPA to do your books

[nobody*s_perfect]

You are supposed to be reporting your eBay income every year whether or not you get a 1099-K.  If you get one this year, not only do you need to report this year's income, but also the IRS will also be interested in next year's return and possibly in your past ones.

As noted in the other post, IRS Schedule C and its instructions can help you understand how the IRS looks at this. You will see that it has separate lines for each type of expense (postage, fees, etc.).  

You need to get professional expertise to provide some insight into how to handle your purchase expenses, but the better-prepared you are to use an expert, the less time they will have to spend on your return. It doesn't go item-by-item as in your example of 3 copies of a game.

[soh.maryl]

You will receive the best and most accurate advice from your professional tax consultant.  

[divwido]

7K for items, plus fees are a cost of doing business.  The cost of making that 20K

[divwido]

By the way, taxes are all about accounting which is done in debits and credits.  So think in those terms.  You made $ 20 on a came, that is a credit.

From that deduct costs-the game price, the fees, the box you had to buy to ship it, any other expense and then you come to a  net price.

I would advise you to learn Excel.  Easiest way to keep track of debits and credits.

[chapeau-noir]

A chat forum is really not the place to get tax advice - use a tax consultant - they do not have to be a CPA, a tax specialist will be able to help you and are far more affordable, and can be worth their weight in gold as they know all of the legal deductions.

Agree with the Excel advice, though - if you don't use it now, it's very easy to learn.

[caldreamer]

Years ago my CPA laughed when I told him (I have a HOBBY of making money on EBAY).   He said the IRS doesn't consider it a hobby (even if you make $1 you must report it).

There are numerous deductions you can take but you need a tax professional to help you with all the paperwork.   

[sin-n-dex]

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@sir_vidiot wrote:

I just broke 20K in sales so i assume I will get a 1099K.  Sorry if these are dumb questions.

Gaming is my life long hobby so 95% of my ebay sales are games (new and used) as I have a giant collections from the 80's onward.

1.   About 7K is actual profit (13K is expenses.  I buy a ton of games that go into a backlog to be played later).   So 7k will be considered capital gains?

2.   If they are considered gains,   can I sell items for losses to cancel the gains like stocks ?

Example

I have 3 copies of game X that I bought for $20 each.

I sell 2 copies for $40 (lets say $20 profit (forget fees/taxes for simplicity) $40 total profit

The game price tanks and I sell the 3rd copy in the same year for $5 ($15 loss), can I use that $15 as a loss?

Thanks

---

If you don't have receipts for that 13K in expenses, it will not be accepted on your tax return. To show the prices you paid for the games (and any operating costs) you need to have expenses tracked and recorded on a Schedule C.

The cost of the games is "cost of goods sold", but I'm not sure how that applies if you've purchased the item many years before and enjoyed using it. I would have to say that in this case you are selling your personal items (which is not subject to income tax, however due to the volume of what you had sold, no one will believe you sold 20K in games you personally owned).

There are two methods of accounting, cash method and accrual method. The cash method means you write off the expenses in the year they occur (the cost of the games), but the accrual method means you record the cost of the games as "cost of goods sold" against the amount you received for the games.

I'm also going to point out that I'm in Canada (and work as a bookkeeper and thus do my own taxes), so your mileage may vary when it concerns the IRS. You may wish to spend a consultation with a tax accountant to get the correct answers to your situation.

C.

[sin-n-dex]

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@divwido wrote:

7K for items, plus fees are a cost of doing business.  The cost of making that 20K

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He said 7K in "profit", not 7K in "cost of items". He said the expenses were 13K, which I'm assuming includes the cost of the games.

In Canada we can't write off the cost of stuff we buy as expenses when we buy it (and as a bookkeeper I will attest that will mess you up on later returns). The cost of goods sold is the cost of what we bought, at the time we sold it. We track that with opening and closing inventory.

But as I've said, with the IRS there may be more flexibility with cost of goods.

C.

[sin-n-dex]

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@caldreamer wrote:

Years ago my CPA laughed when I told him (I have a HOBBY of making money on EBAY).   He said the IRS doesn't consider it a hobby (even if you make $1 you must report it).

There are numerous deductions you can take but you need a tax professional to help you with all the paperwork.   

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The day I was told to file a monthly federal tax return for sales tax was a great day... I started making $200 a month on my returns because items are bought in Canada and sold to the US. Selling to the US from Canada means no sales tax to collect (and eBay takes care of that now). But buying in Canada means I pay tax, and I'm entitled to that being refunded with a federal tax ID.

C.

[glgenterprise]

 You really need to be consulting a tax professional on this - once you start an accounting method for your cost of acquiring the goods you are selling, you have to stick with that method forever more going forward.

There is more than just the purchase price that can be part of the cost of sale- postage (obviously), cost of shipping materials, even portions of your printer cost for labels, and mileage to deliver the items to the shipper. A pro can let you know what you can legitimately deduct and what you cannot.

[luckythewinner]

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I buy a ton of games that go into a backlog to be played later

Games that you buy for your own personal use are not business expenses. 

That aside ... 

Accounting for inventory can be complicated. For part time hobby sellers who don;t want to bothered by tedious accounting work, IMHO the simplest method by far to account for your inventory is to use cash accounting and treat your inventory as non-incidental material or supplies as outlined in IRS Publication 334:

"If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid to acquire or produce the inventoriable items treated as materials and supplies in the year in which they are first used or consumed in your operations."

This means you would purchase your inventory using your own money, and not deducting the cost of the game as an expense until you sell that game. You are essentially purchasing the games for personal use, and not treating them as inventory until the moment you sell it. 

So let's take your example where you spent $20, $20, and $20 on three games and later sold them for $40, $40, and $5.

When you sold the first game, you would record $40 in income, and expense $20 for the cost of goods sold.  When you sold the second game, you would record $40 in income, and expense $20 for the cost of goods sold.  When you sold the third game, you would record $5 in income, and expense $20 for the cost of goods sold. 

The income and the expense for each sale would be recorded in the year that the game was sold, regardless of when you actually bought the game. By treating your inventory as non-incidental material or supplies, you can avoid the tedious job accounting for your inventory (aside from keeping track of how much you paid for it, obviously). 

[jayjaspersgarage]

Sure, and report all the past garage sale items sold each year as well.  The key is to never get close to 20K.  

[jayjaspersgarage]

Before my late wife passed we always wanted to get audited so that the IRS would incur the lovely expense of accommodating her special wheelchair needs as a double organ transplant recipient.  Thankfully we were never audited in 36 years of marriage.  You think she was late to events when she was alive?  Now she is perpetually late.  Ba da Bum!  She died from a stroke in less than 20 minutes.  We sure were efficient.  I called it a stroke of good luck!  Ba da bum!