Jump to content
IGNORED

With the tax changes starting next year, will this impact your price cap for buying single items?


Recommended Posts

I just don't get how to record satisfactory bookkeeping and receipts.  Like if you buy a lot of 10 ga.es off Craigslist for $50 and keep 2 games and sell the rest online of $100, what is the COGS? Do you average out the cost per item at the time of purchase?  As in, each game is worth $5 and you COGS is $40 for the sale?  Do you use $50 COGS? And hold the rest? What if you decide to sell the remaining 2 games later?  What if you keep 8 if the games and sell the rest of the lot for only $20?  Is that $10 of income using a cost of $5 per game or a $30 loss?  Who the fuck knows.

What if you bought a game 15 years ago and decide to sell it now? How do you prove your cost basis?  How do you prove you've had it over a year to potentially hit Capital Gains rates?  

If you repair consoles, proving costs for parts and consoles and depreciation of tools will be a bitch.

What if you bought something before you knew about this law and didn't keep the receipt?  My SIL bought a $900 robot vacuum a few years ago and sold online for $600ish.  She had to pay taxes on the money she earned to buy it and if she didn't have a receipt then she has to pay more taxes, plus SE tax, to sell the damn thing.  Wtf

What if you sell and have a loss on the year?  Will the lossee be clawed back with hobby-loss?  

If you buy stuff locally with cash and no receipt, and sell online, how do you prove your cost basis? 

If register as an LLC can I use a home office deduction for the square footage off my home where I clean, test, and repair games and consoles?  Can I write off mileage for game hunting and finds?  

If I buy from a thrift store and the receipt isn't itemized or descriptive, is there more burden of proof put on me for deteming the cost basis?

It's so easy to come up with convoluted scenarios with this dumb provision.  Really, it's just another regressive tax on poorer people while the ultra rich keep getting the tax code written in their favor with loss carry forwards, capital gains rates, etc.  Like 90% of people on ebay dont want to have to pay a cpa to figure out how to document small business expenses.  This is good job security for me as I do taxes on the side but what a clusterfuck. 

It's literally made to tax someone twice for purchasing something.  Once when they use earned income to purchase it, and again for when they sell it.  Burden of proof is in the taxpayer and if they dont have receipts then they're fucked.

The more I think about this low threshold the dumber it is.

 

Edited by LutherDestroysTheGond
  • Like 4
Link to comment
Share on other sites

6 hours ago, LutherDestroysTheGond said:

I just don't get how to record satisfactory bookkeeping and receipts.  Like if you buy a lot of 10 ga.es off Craigslist for $50 and keep 2 games and sell the rest online of $100, what is the COGS? Do you average out the cost per item at the time of purchase?  As in, each game is worth $5 and you COGS is $40 for the sale?  Do you use $50 COGS? And hold the rest? What if you decide to sell the remaining 2 games later?  What if you keep 8 if the games and sell the rest of the lot for only $20?  Is that $10 of income using a cost of $5 per game or a $30 loss?  Who the fuck knows.

What if you bought a game 15 years ago and decide to sell it now? How do you prove your cost basis?  How do you prove you've had it over a year to potentially hit Capital Gains rates?  

If you repair consoles, proving costs for parts and consoles and depreciation of tools will be a bitch.

What if you bought something before you knew about this law and didn't keep the receipt?  My SIL bought a $900 robot vacuum a few years ago and sold online for $600ish.  She had to pay taxes on the money she earned to buy it and if she didn't have a receipt then she has to pay more taxes, plus SE tax, to sell the damn thing.  Wtf

What if you sell and have a loss on the year?  Will the lossee be clawed back with hobby-loss?  

If you buy stuff locally with cash and no receipt, and sell online, how do you prove your cost basis? 

If register as an LLC can I use a home office deduction for the square footage off my home where I clean, test, and repair games and consoles?  Can I write off mileage for game hunting and finds?  

If I buy from a thrift store and the receipt isn't itemized or descriptive, is there more burden of proof put on me for deteming the cost basis?

It's so easy to come up with convoluted scenarios with this dumb provision.  Really, it's just another regressive tax on poorer people while the ultra rich keep getting the tax code written in their favor with loss carry forwards, capital gains rates, etc.  Like 90% of people on ebay dont want to have to pay a cpa to figure out how to document small business expenses.  This is good job security for me as I do taxes on the side but what a clusterfuck. 

It's literally made to tax someone twice for purchasing something.  Once when they use earned income to purchase it, and again for when they sell it.  Burden of proof is in the taxpayer and if they dont have receipts then they're fucked.

The more I think about this low threshold the dumber it is.

 

You raise some excellent issues some people on here maybe thinking about. As someone that does taxes you should have also stated what are some of the remedies to help everyone know what they should do. 

 

I just don't get how to record satisfactory bookkeeping and receipts.  Like if you buy a lot of 10 ga.es off Craigslist for $50 and keep 2 games and sell the rest online of $100, what is the COGS? Do you average out the cost per item at the time of purchase?  As in, each game is worth $5 and you COGS is $40 for the sale?  Do you use $50 COGS? And hold the rest? What if you decide to sell the remaining 2 games later?  What if you keep 8 if the games and sell the rest of the lot for only $20?  Is that $10 of income using a cost of $5 per game or a $30 loss? 

 It depends on if you decide to keep inventory on your books. If you keep inventory and don’t assign a value to each your COGS would be $40 on $100 sale thus $60 in profit with $10 sitting in inventory. Now in the real world an agent isn’t going to count what was in the listing so you would print the listing and record it a $50 COGS with $100 in sales with $50 in profit. If you sell them later depending on how you handled COGS. If you kept 8 and sold 2 for $20 ………… your profit would be $10. The remaining would sit in inventory and it isn’t a loss.

 What if you bought a game 15 years ago and decide to sell it now? How do you prove your cost basis?  How do you prove you've had it over a year to potentially hit Capital Gains rates?  

 Well this is the tricky part when you don’t have documentation however, in absences of receipts you could rely on price charting, old price guides, digital press guides or whatever from a publication to establish a basis. An  agent is not required to accept it but you’ll find most will if you’re not establishing a loss.

 If you repair consoles, proving costs for parts and consoles and depreciation of tools will be a bitch.

Naw, most tools used in the course of business can use section 179 to expense all in the year purchased.

What if you bought something before you knew about this law and didn't keep the receipt?  My SIL bought a $900 robot vacuum a few years ago and sold online for $600ish.  She had to pay taxes on the money she earned to buy it and if she didn't have a receipt then she has to pay more taxes, plus SE tax, to sell the damn thing.  Wtf

Losses on the sale of personal use property does not count for this. Most personal us property is sold at a loss. This is geared toward hobbyist and investors hiding out on places like eBay. Under prior law, hobbyists could claim as an itemized deduction their hobby-related expenses up to the amount of income the hobby earned during the year. However, the tax cuts and jobs act eliminates the itemized deduction for hobby expenses. Unfortunately, most people on this forum are not true hobbyist which under code is an activity your engaged in for other than profit. Most people try to profit when they sell on eBay. 

 What if you sell and have a loss on the year?  Will the lossee be clawed back with hobby-loss?  

No, and you wouldn’t want it as an hobby because you can’t deduct it. You rather classify it as a business therefore, you can realize the loses.

If you buy stuff locally with cash and no receipt, and sell online, how do you prove your cost basis? 

All you need to do is document it. Create your own receipt and tie it to whatever withdrawal from your bank that ties to the transaction. If its a  stash of cash you have start a petty cash log.

If register as an LLC can I use a home office deduction for the square footage off my home where I clean, test, and repair games and consoles?  Can I write off mileage for game hunting and finds?  

You don’t have to register as an LLC to take the deduction. The home office deduction is the most audited deduction and always a dangerous one to take. The space can only be used for the intended purpose of the business and nothing else. You can write off mileage provided you keep the mileage records.

If I buy from a thrift store and the receipt isn't itemized or descriptive, is there more burden of proof put on me for deteming the cost basis?

Cost basis is always on you but if you have an internal memo for each item purchased, date and whatever you will be in the clear.

End of the day some people have to decide if selling on eBay is a business for them or not. Its more advantageous if it is but you may not want to do the paperwork. Get hit with a tax bill for selling sealed games or a large dollar volume of sales you will have no choice but to learn.

Edited by Mr. CIB
  • Like 2
Link to comment
Share on other sites

Well after reading that stuff, little of that made sense, and just makes this cap even more terrifying.  I want to continue selling, but I can't figure out any way to qualify any of this crap, let alone find a way to write any of it off either against what is pulled in.

So what's the simple answer?  Don't?  Find out if you can have ebay or whatever extract a monthly take and e-file/wire it to the IRS so they don't ruin the refund?  This is just very confusing, and utterly shitty clearly being targeted at those of us with little money left at the end of the month or going into the hole.  What was a good way to break even or dig out, is now just another damned knife in the back burden.

Link to comment
Share on other sites

@Mr. CIB I appreciate the response, and you're right that I should've answered these.  Most people won't and don't know how to cover their asses for this.  My little rant was more rhetorical and geared towards the legislators enacting it (since they're clearly on VGS 😬) because the average person doesn't know how to properly document these and I guarantee that wasn't considered when this was proposed.  It's onerous to all small-time Ebay users. EAs and CPAs also don't want to deal with this shit, the 8 million questions it entails, and the unorganized documentation to sift through.  At least we can charge more for doing potential P&Ls for people who meet the 1099 threshold 🤷‍♂️

I know how to track and manage expenses and you raise a good point about maybe leveraging price charting as I hadn't considered that.  The COGS example I gave could've been better to demonstrate how  assigning costs mat be difficult for the average person who flips to fund their collection, by adding a console to the games or buying with other items (games and toys and books).  People who run businesses on this already know the deal and have paper trails. Most VGSers do not.  

Edited by LutherDestroysTheGond
  • Like 1
Link to comment
Share on other sites

I don't understand how they justify collecting taxes on items that increased in value but not deducting those that decreased. For example, If I bought a new car for $20k and sold it 10 years later for $5k, why can't I deduct that? How is that different? 

 

I'm sure there's some explanation, but it seems wrong to me.

Link to comment
Share on other sites

50 minutes ago, BreaKBeatZ said:

I don't understand how they justify collecting taxes on items that increased in value but not deducting those that decreased. For example, If I bought a new car for $20k and sold it 10 years later for $5k, why can't I deduct that? How is that different? 

 

I'm sure there's some explanation, but it seems wrong to me.

If its for personal property they would not collect tax when you sold nor allow you a write off.

If its for a business you would have depreciated it (straight line or MACRS or Section 179) over the useful life. So assume it was straight line that would be over 5 years (4,000) a year. When you turn around and sell it you would have to recapture it as capital gain. 

Dealing in collectibles at the volume some people do is where the issue is. 

Edited by Mr. CIB
Link to comment
Share on other sites

37 minutes ago, Mr. CIB said:

If its for personal property they would not collect tax when you sold nor allow you a write off.

If its for a business you would have depreciated it (straight line or MACRS or Section 179) over the useful life. So assume it was straight line that would be over 5 years (4,000) a year. When you turn around and sell it you would have to recapture it as capital gain. 

Dealing in collectibles at the volume some people do is where the issue is. 

The "issue" for non-business selling, is that the IRS gets sent a 1099-K that states a top-line gross number that if it doesn't appear SOMEWHERE on your taxes, their automated checking system will potentially flag it for further review.

That is, it would be ill advised to just ignore the form entirely.

And using a Schedule C to deduct cost of goods (and other associated costs) would probably not be correct, since the IRS is within their power to categorize you as a "hobby" in the event that your selling activity is a very small percentage of your overall income.

 

So the "issue" is that there is now an absurdly low threshold for individuals disposing of personal property to have their payment receipts reported to the IRS and by extension their state tax offices, more-or-less negating the older understanding of "yard sale rules".

I would certainly agree that a ceiling lower than $20,000 AND 200 transactions is probably fair and reasonable.

But $600 gross (including shipping costs, sales taxes, and selling fees) is ridiculous when as a "hobby" you lack a straightforward mechanism to deduct cost of goods, let alone the rest of the costs.

  • Like 2
Link to comment
Share on other sites

15 hours ago, LutherDestroysTheGond said:

 

The more I think about this low threshold the dumber it is.

 

Yes, the state-set thresholds are completely asinine and an obvious cash grab that takes advantage of the fact that hobby sellers cannot deduct essentially anything at all under the current tax rules.

 

  • Like 1
Link to comment
Share on other sites

Administrator · Posted

From a practical perspective, I do think a slightly higher threshold would certainly make this easier to deal with.  Given the platform and that for many people it can be similar to a yard sale or a few a year, I think a threshold of something like $5,000 would certainly have been much more practical and easy to deal with.

I actually don't believe this was intended to target super small sellers and hobbyists.  I imagine it was intended for people selling $10,000 a year on ebay year after year, or working to stay under the 20K threshold, and not reporting anything or paying taxes, but idk.

Technically, nothing changed about your reporting and tax paying or deducting requirements here.  Yes - this will "catch" a lot more people of course, and it will be a major nuisance to those with little activity (say...over $600 but under $1,000), however, I'd make a strong bet that a SIGNIFICANT portion of this community and other communities haven't been paying taxes on their profits or gains for a long, long time.  So, whether we agree with it or not, I mean, if you've gotten away with not paying taxes on profits for years and years, maybe be grateful they, practically speaking, don't have the time or resources to go back and investigate all that 🙂

 

 

Link to comment
Share on other sites

21 minutes ago, spacepup said:


Technically, nothing changed about your reporting and tax paying or deducting requirements here.  Yes - this will "catch" a lot more people of course, and it will be a major nuisance to those with little activity (say...over $600 but under $1,000), however, I'd make a strong bet that a SIGNIFICANT portion of this community and other communities haven't been paying taxes on their profits or gains for a long, long time.  So, whether we agree with it or not, I mean, if you've gotten away with not paying taxes on profits for years and years, maybe be grateful they, practically speaking, don't have the time or resources to go back and investigate all that 🙂

What "technically changed" is that previously you could do quite a lot of "break-even" or even "selling at a loss" if you wanted to clean house.

Now, gross transactions are reported at $600, meaning AS A HOBBY SELLER, you're more-or-less screwed if you do even a modest clear-out of stuff.

Hypothetically, cost of goods MAY not need to be an itemized deduction against the gross receipts -- but it certainly didn't seem straightforward to handle it correctly as hobby income (in terms of where you would need to reconcile the 1099-K number versus whatever ACTUAL income you declared).

 

Different story for business sellers, since they can do a Schedule C and should have been tracking all of this in the first place.

Edited by arch_8ngel
  • Like 2
Link to comment
Share on other sites

A lot of stuff I sell I have recently bought and not liked it once I played it (typically sold for close to what was paid, sometimes at a loss for new Switch games), or, it is something I have had for years and the going price is too high to keep it since it is a meh or ok game to me (which would be classified as Capital Gains if held for more than 1 year if treated as a Collectible by the IRS, which it should be treated as).  With my current tax bracket, my Capital Gains rate is 0%. 

So now, for newer items I sell, instead of just selling at slight losses or minimal profits I will get my gross sales reported and have to track receipts.  Nbd but still a little annoying.

But for items I decide to sell that I have owned for years, sometimes decades, I have no way to prove how long I've owned them and now it will be reported to the IRS as a gross amount on a 1099 (taxable at my marginal rate plus SE tax, and as I earn more income it may well likely push me to a higher tax bracket) instead of the Capital Gains rate it should be.  I don't bother reporting the shit now because the effect on my tax bill would be negligible.  Now there is an undue burden of proof put on me to determine cost basis and how long I've owned the items I sell.  It's utter bullshit and designed as a regressive tax.

If they would've lowered it to $10K or even $5K that would be reasonable because then it's not just hobby sellers (barring collection load-offs or finding and selling Stadium Events), it is more likely semi-professional sellers at that point.

Link to comment
Share on other sites

Administrator · Posted
41 minutes ago, arch_8ngel said:

What "technically changed" is that previously you could do quite a lot of "break-even" or even "selling at a loss" if you wanted to clean house.

Now, gross transactions are reported at $600, meaning AS A HOBBY SELLER, you're more-or-less screwed if you do even a modest clear-out of stuff.

Hypothetically, cost of goods MAY not need to be an itemized deduction against the gross receipts -- but it certainly didn't seem straightforward to handle it correctly as hobby income (in terms of where you would need to reconcile the 1099-K number versus whatever ACTUAL income you declared).

 

Different story for business sellers, since they can do a Schedule C and should have been tracking all of this in the first place.

I'm aware of the reporting change of course, but also remember, that there are a few different avenues to handle these types of transactions, and that will depend on each person's own situation and they can certainly discuss those with their own tax professional.

For example, COGS on a Schedule C is not the *only* way to offset the cost of sales.  If you deem it a capital sale, for example, and/or a collectible sale, you can still report your cost basis to offset the proceeds, much like selling a stock.  Obviously it'd be up to you to track that information, but you wouldn't get dinged for the full amount of proceeds.

As for the hobby discussion, it isn't *quite* as cut and dry as you stated.  If you can reasonably defend that the activity is engaged in for profit, and meet various criteria spelled out by the IRS, you can generally report the activity on Schedule C, and it isn't necessarily a dealbreaker if it is just a small amount of income compared to your total income.  There is a whole list of factors the IRS uses to determine if an activity is a hobby.

Bottom line is, there are a few different avenues for deducting your actual purchase costs, such that you don't get completely screwed (of course, assuming you have reasonable info for this).

If you are concerned about the hobby issue, then read up on those factors and make sure you do enough to qualify to report the activity on Schedule C (IF, that is what you want and your circumstances meet that), or consider if you deem them collectible or capital sales.  

Or, if you don't feel you meet the profit / business threshold, and are reporting it like a hobby, do some research or talk to a professional about separating COGS costs from non COGS costs - there are many interpretations of the hobby rules that view utilizing COGS against gross income as appropriate. (Disclaimer: talk to your advisor about this 🙂  )

I'm not saying it's fun to deal with all this, but there are at least a few options on the table.

  • Like 1
Link to comment
Share on other sites

29 minutes ago, spacepup said:

Or, if you don't feel you meet the profit / business threshold, and are reporting it like a hobby, do some research or talk to a professional about separating COGS costs from non COGS costs - there are many interpretations of the hobby rules that view utilizing COGS against gross income as appropriate. (Disclaimer: talk to your advisor about this 🙂  )

I'm not saying it's fun to deal with all this, but there are at least a few options on the table.

Well, the secondary irritation in this, is that the cost of engaging a professional is going to pretty quickly match the cost of just paying the tax, as a one-off event, assuming you're only talking about a couple thousand in gross receipts.

I'm sure as this becomes more of an issue, the online guidance will get better (as right now, most of what you can find is still outdated and in reference to the previous tax law)

Link to comment
Share on other sites

Administrator · Posted

That is a fair point.  I mean, it's not that I "like" this change, and I do agree that it is going to catch a lot of people who will probably just pay tax on the full amount of the form, not knowing how to deal with it or that there is even an option, and that is unfortunate.

Since we are specifically talking about hobby income, what I can share that might help, is that IF you deem the hobby reporting the correct reporting for your situation, one practical avenue of handling this, is to report gross hobby income as "Other Income" on the return, and then second line item of other income, for a negative amount, regarding your direct cost of goods sold.  This is a relatively easy way to report that can likely be done on one's own or with simple software.  Many people don't realize you can report a negative number in 'other income.'

(Disclaimer: this is not tax advice - consult your advisor 🙂 hahaha, have to add)

  • Like 1
  • Thanks 1
Link to comment
Share on other sites

Administrator · Posted

We can complain about it day and night, but barring a change (which I suppose is possible), many in our community are going to have to deal with this in some form, so I'm merely just trying to discuss some avenues that maybe people could use to help deal with it.

People can choose to not use these platforms - that would obviously prevent these forms.

But obviously they are very helpful in selling, so if you need to use them and will have this problem, do some research now in what information to keep and how to report, so that you won't be caught off guard.  I really don't want to see people paying extra money just because they don't know how to handle something like this.  

Sure, it might suck to have to deal with it, but if it's worth it to you to save some money, try to get ahead and keep good information.

As for the comments about older items, document the best you can about your basis or cost in these items - whatever information you have available.  Maybe it won't be absolutely rock solid defense, but, do the best you can to legitimize the transaction and report it as honestly and accurately as you can, and that will typically be fine.  It isn't a guarantee there won't be an issue, but as someone pointed out, not all auditors will straight up disallow something because you don't have a receipt - it can very much be a facts and circumstances situation and if they see someone with good documentation and a very legitimate due diligent attempt at documentation and recordkeeping, it may work for you.

 

  • Like 1
Link to comment
Share on other sites

34 minutes ago, spacepup said:

Since we are specifically talking about hobby income, what I can share that might help, is that IF you deem the hobby reporting the correct reporting for your situation, one practical avenue of handling this, is to report gross hobby income as "Other Income" on the return, and then second line item of other income, for a negative amount, regarding your direct cost of goods sold.  This is a relatively easy way to report that can likely be done on one's own or with simple software.  Many people don't realize you can report a negative number in 'other income.'

(Disclaimer: this is not tax advice - consult your advisor 🙂 hahaha, have to add)

That is an interesting idea (regarding the "negative other income").

Is there a specific key word to associate with it? (i.e. "Hobby Income - cost of goods sold" or something to that effect?)

It does seem to directly solve the problem of the IRS software wanting to see the 1099-K top-line number show up SOMEWHERE, at least.

 

And as a practical matter, having a "negative income" disallowed upon review is probably less of a headache than needing to fully justify yourself as a "business" if push comes to shove and the IRS thinks you were really a "hobby" instead.

Link to comment
Share on other sites

Administrator · Posted

I don't have the golden ticket answer on a description - but you could do something like what you referenced and that should be fine.

I can assure you that a negative adjustment to other income does not trigger an automatic disallowance or notice.  There are many different situations where something might be reported in that way, and as long as the description is clear, concise, and thorough, there shouldn't be a problem.  

Obviously make sure the negative COGS adjustment does not exceed proceeds - the net would need to be 0 or higher.

You are correct that their system wants to see the gross amount reported somewhere on the return, whether that is Schedule C, Schedule D, or Other Income.  And then relevant adjustments either as COGS or cost basis for a sale, can be used.

This would be just one way to report these types of transactions.  I imagine many of our members who sell a lot could also report the activities on Schedule C - but there are pros and cons to that depending on the totals.  

If anyone is interested, feel free to review IRS Publication 535, https://www.irs.gov/pub/irs-pdf/p535.pdf

Specifically, "Not-for-Profit Activities" on Page 7 - it discusses many of the issues we're talking about here, as well as the various "profit-motive" factors that the IRS uses to determine if an activity is a hobby or engaged in for profit.  If you believe your activity is for profit and want to report the full COGS and expenses, try to "check off" as many of these items as possible, to increase your chances of solidly defending the activity if ever audited.  You don't have to meet ALL of them, and they aren't necessarily prioritized outright - you'd want to meet as many as possible.

 

  • Thanks 1
Link to comment
Share on other sites

8 hours ago, arch_8ngel said:

The "issue" for non-business selling, is that the IRS gets sent a 1099-K that states a top-line gross number that if it doesn't appear SOMEWHERE on your taxes, their automated checking system will potentially flag it for further review.

That is, it would be ill advised to just ignore the form entirely.

And using a Schedule C to deduct cost of goods (and other associated costs) would probably not be correct, since the IRS is within their power to categorize you as a "hobby" in the event that your selling activity is a very small percentage of your overall income.

 

So the "issue" is that there is now an absurdly low threshold for individuals disposing of personal property to have their payment receipts reported to the IRS and by extension their state tax offices, more-or-less negating the older understanding of "yard sale rules".

I would certainly agree that a ceiling lower than $20,000 AND 200 transactions is probably fair and reasonable.

But $600 gross (including shipping costs, sales taxes, and selling fees) is ridiculous when as a "hobby" you lack a straightforward mechanism to deduct cost of goods, let alone the rest of the costs.

Nowhere I stated to "ignore" any form entirely. You may be assuming that when I said they wouldn't collect tax. You still have to file and take the proper deductions in order to account for the 1099-k once it's issued.

The IRS rather classify you as a business than a hobbyist. They NEVER want to classify you as a hobbyist. They want to tax you and true hobbyist activity for the most part is not for profit. 

9/10 people on this forum would fail the IRS 9 rule test for being a hobbyist. What's been happening is people have been sliding by the $600 rule.  It is NOT a new rule. You are required in any business to send a 1099 to anyone you pay over $600. Now the are forcing online companies to do so. They have lobbied for years to stop it but at the end of the it got delayed as long as it could.  

Everyone needs to educate themselves you can better position yourself.  Also the IRS doesn't recognize a "Hobby Seller" no such thing exist under the code.

as an FYI per the IRS website

Question
How do you distinguish between a business and a hobby?


Answer
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
2. Whether you have personal motives in carrying on the activity.
3. Whether the time and effort you put into the activity indicate you intend to make it profitable.
4. Whether you depend on income from the activity for your livelihood.
5. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
7. Whether you were successful in making a profit in similar activities in the past.
8. Whether the activity makes a profit in some years and how much profit it makes.
9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations.

Edited by Mr. CIB
Link to comment
Share on other sites

I don't know, reading those 9 points I mostly feel like a hobby seller.  I don't conduct what I do like a business, other than to guard my ass from scam tactics on ebay.  My motive entirely is so I can get rid of what I don't use, get things I will use, and turn stuff around so I can just do the hobby at all.  I put a minimum of time and effort into it, most the effort is just taking pictures and resizing them.  Not sure about #5, don't have #6 as if I were a business I'd be out of business how it goes.  I do make a profit sure, but that's relative.  The money went straight back into the hobby, not paying bills, employees, warehouse rent or other business practices which I couldn't afford.  What goes in goes basically right back out, either fairly quickly, or in recent times I've been hoarding a bit so I can buy a new PC when my current one fails so I'm not up a creek.  I see no profit appreciation from what I use in the activity.  My bubble bags, PC, packing supplies are not going to increase in value from when bought.

If I'm not interpreting this right, say so and how, but I feel like a hobbyist, so what would I do when the time comes?  It still feels like a my word vs theirs situation.

  • Like 2
Link to comment
Share on other sites

On 4/23/2021 at 10:54 PM, Mr. CIB said:

 

Question
How do you distinguish between a business and a hobby?


Answer
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
2. Whether you have personal motives in carrying on the activity.
3. Whether the time and effort you put into the activity indicate you intend to make it profitable.
4. Whether you depend on income from the activity for your livelihood.
5. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
7. Whether you were successful in making a profit in similar activities in the past.
8. Whether the activity makes a profit in some years and how much profit it makes.
9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations.

 

So for what I assume the TYPICAL seller getting looped into the new 1099-K reporting (that were nowhere near the old threshold) -- they will likely have at best a fairly even balance of "No" vs "Yes".

And for someone with a good level of earned income, and relatively low selling volume (i.e. a few thousand per year, max) -- it certainly seems like they would fail enough of these questions to be a Hobby activity in the eyes of the IRS.

 

Based on the helpful comments further up, though, it sounds like at least cost-of-goods for Hobby Income (reported as a negative number) is "more correct" (or at least "lower risk") than claiming a business that doesn't actually exist so that you can deduct the fees, shipping, and mileage on top of cost-of-goods-sold.

 

 

 

Link to comment
Share on other sites

@arch_8ngelIf you sell things online for a profit even one thousand dollars you are still considered a business. If you buy things in bulk for your collection and want to trade stuff say game for game you got extra which are for your collection then you are a hobbyist. Once money is involved up to $600 soon you must report. If you get a form through Ebay or Paypal just fill out the needed information when your accountant sends you forms and be done with it. I have a book where I track all my sales, purchases, shipping cost, and fees. It takes long for me cause of the volume. If someone is doing very minimal then it won't take long at all. Mileage tracking is simple. Just estimate the amount of miles up and back from the post office and multiple it by the number of receipts you have. Then if you can think of any other trips you make add those as well. We are talking very minimal here. I am telling you it's no big deal.

  • Like 1
Link to comment
Share on other sites

On 4/24/2021 at 11:10 AM, Tanooki said:

I don't know, reading those 9 points I mostly feel like a hobby seller.  I don't conduct what I do like a business, other than to guard my ass from scam tactics on ebay.  My motive entirely is so I can get rid of what I don't use, get things I will use, and turn stuff around so I can just do the hobby at all.  I put a minimum of time and effort into it, most the effort is just taking pictures and resizing them.  Not sure about #5, don't have #6 as if I were a business I'd be out of business how it goes.  I do make a profit sure, but that's relative.  The money went straight back into the hobby, not paying bills, employees, warehouse rent or other business practices which I couldn't afford.  What goes in goes basically right back out, either fairly quickly, or in recent times I've been hoarding a bit so I can buy a new PC when my current one fails so I'm not up a creek.  I see no profit appreciation from what I use in the activity.  My bubble bags, PC, packing supplies are not going to increase in value from when bought.

If I'm not interpreting this right, say so and how, but I feel like a hobbyist, so what would I do when the time comes?  It still feels like a my word vs theirs situation.

Unfortunately, video games are now viewed as a collectible and not as a hobby where we all started thus the selling activity will be looked at. If you purchase say over 10k worth of stuff a year you are not going to get by saying its just a hobby and turn around and say it was to upgrade you stuff or for other things. They will ask, why are you upgrading? Isn't a nicer copy more valuable? Your done. or well I took the profits and bought something else.... your done. It is not going to register to the average agent that you spent 10k not for a benefit. I say these things so everyone can prepare if they are audited. The more publicity video games get the more Uncle Sam will want a cut. Video games are an asset now. If they appreciate on their own that's one thing but if you are working to upgrade that asset ask yourself what the average person will think. Flipping and buying something else is making profit to enhance your collection. 

Here is where they would trap most people along with you answers above.

2. Whether you have personal motives in carrying on the activity.
6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Old time (2008) read from Price Charting Blog

https://blog.pricecharting.com/2008/04/irs-cares-about-your-video-game.html#:~:text=Your video game collection could,tax bill this April 15.

Edited by Mr. CIB
  • Like 3
Link to comment
Share on other sites

1 hour ago, arch_8ngel said:

 

So for what I assume the TYPICAL seller getting looped into the new 1099-K reporting (that were nowhere near the old threshold) -- they will likely have at best a fairly even balance of "No" vs "Yes".

And for someone with a good level of earned income, and relatively low selling volume (i.e. a few thousand per year, max) -- it certainly seems like they would fail enough of these questions to be a Hobby activity in the eyes of the IRS.

 

Based on the helpful comments further up, though, it sounds like at least cost-of-goods for Hobby Income (reported as a negative number) is "more correct" (or at least "lower risk") than claiming a business that doesn't actually exist so that you can deduct the fees, shipping, and mileage on top of cost-of-goods-sold.

 

 

 

Hobby expenses can't exceed to the income therefore it can't be negative. I will copy something from Turbo Tax to break down an example.

Hobby income and expenses
Beginning in 2018, the IRS doesn't allow you to deduct hobby expenses from hobby income. you must claim all hobby income and are not permitted to reduce that income by any expenses.

For tax years prior to 2018, you can deduct expenses as an itemized deduction subject to 2% of your adjusted gross income. Also, the amount that you claim as an expense cannot be greater than your income from the hobby. In other words, your hobby cannot generate a loss. For example, if you're a knitter and spent $300 on yarn and other supplies, and sold one sweater for $150, you can use only up to $150 in expenses ($300-$150 = $150). But, if you spent $300 on your knitting hobby and earned $300 from the sale of two sweaters, you can use the full amount of your expenses. The expenses you can deduct are called "ordinary expenses" and "necessary expenses."

Ordinary expenses are those required to carry out the hobby, such as fabric and thread for a quilter.

Necessary expenses are those that help you develop the skills your hobby requires, like attending a quilting class.

I am sorry but the hobby thing wont work for the volume of a normal video game collector. 

Link to comment
Share on other sites

Administrator · Posted
3 hours ago, Mr. CIB said:

Hobby expenses can't exceed to the income therefore it can't be negative. I will copy something from Turbo Tax to break down an example.

Hobby income and expenses
Beginning in 2018, the IRS doesn't allow you to deduct hobby expenses from hobby income. you must claim all hobby income and are not permitted to reduce that income by any expenses.

For tax years prior to 2018, you can deduct expenses as an itemized deduction subject to 2% of your adjusted gross income. Also, the amount that you claim as an expense cannot be greater than your income from the hobby. In other words, your hobby cannot generate a loss. For example, if you're a knitter and spent $300 on yarn and other supplies, and sold one sweater for $150, you can use only up to $150 in expenses ($300-$150 = $150). But, if you spent $300 on your knitting hobby and earned $300 from the sale of two sweaters, you can use the full amount of your expenses. The expenses you can deduct are called "ordinary expenses" and "necessary expenses."

Ordinary expenses are those required to carry out the hobby, such as fabric and thread for a quilter.

Necessary expenses are those that help you develop the skills your hobby requires, like attending a quilting class.

I am sorry but the hobby thing wont work for the volume of a normal video game collector. 

I agree that many reasonable volume sellers are probably engaged in for profit.  

However, his comment about the "negative" income, is not a net negative income.  I was providing some example procedures, IF one determines their activity is not-for-profit, on how to technically report gross income as other income, and cost of goods sold as a negative item on "other income" in order to offset the hobby income.  I explained above the net would have to be zero or greater.

One thing I will remind people here, however, is that in addition to the "profit-motive" factors I linked earlier, there is also a segment in the same publication I linked about a presumption of profit -- If you have profit for 3 years for example, in your activity, then you are generally presumed to be in business for profit (it is sort of a safe harbor, if you will).  There are pros, and also cons, to reporting the activity on a Schedule C.  Every person will need to evaluate their own situation and perhaps speak to a tax professional or examine these rules in detail.

I'll add as well.... the IRS is *typically* only interested in classifying an activity as not-for-profit (hobby, if you will), if you are taking losses on your return, for expenses exceeding your income.  If you are reporting an activity that is generating actual profit more often than not, then you probably shouldn't worry about the IRS saying it is a hobby.  At that point, you just want to make sure you are keeping good records to defend all of your expenses.  Typically, business income / Schedule C reported income, is more expensive to the taxpayer because of having to pay self-employment taxes on top of ordinary income.  

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...