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

[arch_8ngel | 1,597]

8 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.

...

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

I think SpacePup covered this above -- in terms of how to offset cost of goods against gross income if it is, in fact, "a hobby".

Is it your opinion that his explanation is incorrect?  (i.e. post-2018, can you no longer remove cost-of-goods-sold from gross income for "hobby income"?)

 

 

But I'm also curious what you think the "volume of a *normal* video game collector" is.  Seems like a pretty sweeping assumption to make.

 

Edited April 26, 2021 by arch_8ngel

[arch_8ngel | 1,597]

4 hours ago, spacepup said:

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.  

So, what I'm interested in is Mr CIB's statement that the IRS wants to force you to claim as a "business" rather than a "hobby".

Most of what I have read, suggests the opposite -- that the burden of proof is to prove that you're a legitimate business so that you can claim the additional deductions that are available.  (i.e. it isn't so much that if you have 3 years of profits they force you to be a business -- the way I had always read discussions about that, was that too many consecutive losses will cause them to say you're NOT a business, so that you lose some deductions by being forced into "hobby" status).

 

The only "benefit" that I'm aware of for claiming income as a "hobby" is that it negates self-employment income.

 

Would be curious, as well, to hear what YOU would call "reasonable volume" where you'd be presumed a business rather than a hobby.

[DoctorEncore | 3,691]

Wow, this is bullshit. This is not taxing "small businesses." This is taxing regular citizens.

I don't understand this obsession with taxing individuals in the United States. In the 1950s, corporate taxes made up about 35% of federal tax revenue, while individual income taxes accounted for 40%. Now corporate taxes account for only 7% and individual taxes account for 50%! That's not a typo. Corporations really only provide a measly 7% of federal tax revenue!

Even worse, payroll taxes keep going up! And guess what? Employers don't even pay their fair share. Studies have shown they just lower wages and decrease benefits to offset their portion of the payroll costs.

I really don't understand how any citizen of this country is okay with this. I don't care if you're Republican, Democrat, Libertarian, or whatever. If you think it's good that our deficit is soaring and we try to pay for it by taxing individual citizens more, then you've got a severe case of Stockholm Syndrome.

*Note* - I'm not against capitalism or business. Well-regulated capitalism is the ONLY system that works and provides for true financial mobility for all citizens. I just think we've totally destroyed the "well-regulated" part over the past 50 years.

[RegularGuyGamer | 2,012]

49 minutes ago, DoctorEncore said:

I really don't understand how any citizen of this country is okay with this. I don't care if you're Republican, Democrat, Libertarian, or whatever. If you think it's good that our deficit is soaring and we try to pay for it by taxing individual citizens more, then you've got a severe case of Stockholm Syndrome

You're saying the quiet part out loud with this one. Corporations are out overlords with a government as a veil. It's in their best interest that individuals take on the tax burden.

I thought no one who makes under $400k would see their taxes go up . Now I'm getting taxed on the little bit I make off of selling trash on the side. 

[spacepup | 2,404]

1 hour ago, arch_8ngel said:

So, what I'm interested in is Mr CIB's statement that the IRS wants to force you to claim as a "business" rather than a "hobby".

Most of what I have read, suggests the opposite -- that the burden of proof is to prove that you're a legitimate business so that you can claim the additional deductions that are available.  (i.e. it isn't so much that if you have 3 years of profits they force you to be a business -- the way I had always read discussions about that, was that too many consecutive losses will cause them to say you're NOT a business, so that you lose some deductions by being forced into "hobby" status).

 

The only "benefit" that I'm aware of for claiming income as a "hobby" is that it negates self-employment income.

 

Would be curious, as well, to hear what YOU would call "reasonable volume" where you'd be presumed a business rather than a hobby.

You should evaluate your activity every year to determine if it is a for-profit business or a “not-for-profit” / hobby activity.  If you have profits year after year, you most likely have nothing to worry about.  However, if you do have many years of losses and over time, you’re losing money on the ‘business’ among other factors, it may be considered a hobby.

Profit is key here.  If your activity is consistently or more often than not profitable, after expenses, you are probably not a hobby, especially if the selling is regular.

It will depend on each case, but when I say reasonable volume, if someone (like many members here) is selling collectibles and making profit and doing it regularly and continuously throughout the year, and making profit on the sales, that is most likely a business whether it is $1,000 of profit or $10,000 of profit.

In my experience, the IRS doesn’t specifically audit or question profitable sole-proprietor businesses (for this issue).  They question businesses that have losses, especially for multiple years.  So yea, if you report a schedule C and deduct all your expenses and have losses for many years, they may question that if audited or say it is not-for-profit.  

Read this section about presumption of profit and hopefully it will help explain.  If you have a profit for 3 out of 5 years, you get a sort of “safe harbor” / allowance where you don’t even have to worry about the other factors. 

 

 

[O.G. CIB | 415]

3 hours ago, arch_8ngel said:

I think SpacePup covered this above -- in terms of how to offset cost of goods against gross income if it is, in fact, "a hobby".

Is it your opinion that his explanation is incorrect?  (i.e. post-2018, can you no longer remove cost-of-goods-sold from gross income for "hobby income"?)

 

 

But I'm also curious what you think the "volume of a *normal* video game collector" is.  Seems like a pretty sweeping assumption to make.

 

You can take the information and spin it how you feel. The key word is "intent"........ your intent was to turn a profit to purchase other things. You can not make a profit off a sale then turn around and have the profit buy items you intent to keep. A hobby is an activity that an individual pursues without intent to generate a profit. Everyone that sells games intents to make a profit. 

If you file your taxes using Form 1040 (which I assume most here do) you report hobby income on Line 21, for “Other income.” which is the easiest way to do it but if you are a collector which everyone here is you are selling a collectible which is handled different. Selling collectibles for profit, you may report income from sales on a Schedule D. Therefore you could be taxed at capital gains rates instead of ordinary income tax rates.  Where do you take the deduction?

Before the 2018 tax year, you could deduct hobby expenses equal to your hobby income. For tax years after 2018, this deduction is no longer available. Your hobby expense was always on a Schedule A when you itemize your deduction but when the tax law change in 2018 it didn't matter  whether you do or don’t itemize you’ve lost the deduction for hobby expenses in 2018 and after anyway because tax reform removed the miscellaneous deduction. The reform eliminates write-offs for miscellaneous itemized deduction items that under prior law were subject to the 2%-of-AGI deduction threshold. 

THERE IS NO PLACE TO WRITE OFF HOBBY EXPENSE. You will be taxed for the full 100% amount of your 1099 from ebay, paypal or wherever. So keep fooling yourself that you are a hobby if you want to, you'll have a tax bill that will make your head spin. 

@spacepup are you aware of this? Because they are understanding that you can write off hobby expense like you use to and you can't.

A matter of fact forget what I'm saying, read it yourself  

https://www.irs.gov/newsroom/tips-for-taxpayers-who-make-money-from-a-hobby

 

Edited April 26, 2021 by Mr. CIB

[spacepup | 2,404]

@Mr. CIB I agree that most are probably either collectible sales or business income.

I am aware of the removal of misc. itemized deductions from TCJA.

What I was sharing, is that if someone does assess income as “hobby income,” there are many interpretations that you can write off ONLY pure cost of goods sold, offsetting hobby income, but obviously no other expenses.  IF someone wants to report that way.  It may be more appropriate to report a sale on Schedule D as you said anyway.

I am not advising people to report that way necessarily.  arch asked about the technical mechanism for doing that, and I shared.

If I gave off the impression you can deduct “hobby expenses” (other than direct pure COGS), sorry because yes, those are not deductible anywhere.

This is why I added my disclaimer above about consulting a Professional and not relying on comments from our forum.  I merely wanted to share some avenues, but it is easy to confuse things or misinterpret.

Anyone who does consistent selling for profit (ongoing, regular sales, trying to make money) should not rely on discussions above about “hobby.”  Sorry for any confusion.

[spacepup | 2,404]

A lot of people seem to think that you are taxed on the full amount of the 1099-K, with the ONLY exception being if you are a business, and I just wanted to share that that may not necessarily be the case.

For example, let's say you don't sell much at all, but you buy a PS5 for $500, thinking you'll use it.  Decide you don't want, sell on ebay, end up making $1,000, and under the new reporting rules, get a 1099-K for $1,000.  It isn't necessarily guaranteed that you'll pay tax on the full $1,000.  There are a few *potential* avenues for reporting, depending on your situation, where you may be able to write off at least the cost of the initial purchase, and thus only pay tax on the true 'profit' you made.  That is the main thing I wanted to express here, before people just pay tax on everything without even thinking about or trying.  You'll want to explore this further and keep good records, but don't just assume you'll be screwed on the entire amount no matter what.

[arch_8ngel | 1,597]

9 hours ago, Mr. CIB said:

 

THERE IS NO PLACE TO WRITE OFF HOBBY EXPENSE. You will be taxed for the full 100% amount of your 1099 from ebay, paypal or wherever. So keep fooling yourself that you are a hobby if you want to, you'll have a tax bill that will make your head spin. 

@spacepup are you aware of this? Because they are understanding that you can write off hobby expense like you use to and you can't.

A matter of fact forget what I'm saying, read it yourself  

https://www.irs.gov/newsroom/tips-for-taxpayers-who-make-money-from-a-hobby

 

I get that part -- the question is -- as a battle between two tax guys on the forum -- what is the actual defensible way for people who are more-or-less "cleaning house" to NOT be taxed on "cost of goods sold" versus your gross-reported 1099-K?

To do so, does it completely negate the "relative convenience" of "hobby" income as "other income" on a 1040?

And what are the "gotchas" for what might invalidate using a Schedule D? (which at a fundamental level, I personally would say that MOST "collectors" are trading in collectibles for long and short term capital gains rather than claiming they are "running a business" of any sort)

So of the 3 possible options -- "collectibles" on a Schedule D "feels" more correct and accurate, when I can certainly say that I, at least, am not engaging in casual eBay selling in any sort of "business-like" manner.

 

Edited April 26, 2021 by arch_8ngel

[spacepup | 2,404]

Ok, so here is my opinion, and obviously each person's individual scenario could be different.

(Group A - Business Sales) - If you are selling often and it is a regular, continues sort of activity, and you typically make profit - this is most likely business / for-profit income to be reported on Schedule C of your tax return.

(Group B - Collectible Sales) - if you are just "cleaning house" or selling off some of your collectibles, and it's not really a regular or continuous thing, I would *personally* report this on Schedule D as collectible sales.  They are nonbusiness capital-type assets.  You can report your cost basis for each sale to offset the proceeds, and thus only be taxed on the gain.  You cannot deduct sales that are losses (sold for less than you paid) - those would be nondeductible personal losses unless you can prove it was a purely investment vehicle.  Games from your collection would probably not meet that criteria.

(Group C - Other Income / Hobby) - This is probably the *least* common here and the least common method of reporting, but there could be some individual scenarios that meet this.  For example, if it would otherwise be a business but you are losing money hand over first, or don't meet *any* of the profit-criteria.  Or if you just want to report your 1099-K and don't have any remotely solid information and just want to report and move on.

Based on your questioning and situation you described @arch_8ngel - it seems (though I'm not 100% sure), that you're probably in Group B above and would be reporting them as collectible / capital sales.  If you have further questions about it though or want to talk further, feel free to PM and we can discuss more.  I don't want to bog up the forum more than I already have with technical jargon and discussions that most people probably don't want to see hah.

@Mr. CIB - would you say the above is a somewhat fair assessment of the situation?  Share any thoughts of course.

Edit: Forgot to answer this part.  I don't think there are many "gotchas" on Schedule D arch.  You'd need to be able to defend your basis reported, if ever questioned or audited.  As long as you have backup or information for that, you should be fine.  The basis can include what you paid for the item if you have that information, but it can't include "other expenses," so think pure COGS in the context of our earlier discussions.

[arch_8ngel | 1,597]

Thanks @spacepup -- yes, I would agree that, if there is a low likelihood of going the Schedule D route would trigger an audit or other trouble with the IRS, that it certainly FEELS "most accurate" in how I would describe myself (and likely many other "collectors" and general hobbyists) disposing of "extras" that have collectible value on the open market.

When I've had a game (video game, board game, whatever) sitting on my shelf for a decade, and I decide to clean house -- sure, I want to get all of the profit I can out of it, but it would be a REAL stretch IMO to claim I am "operating as a business".

 

Are there decent statistics out there for the risks of each of these methods above (A, B, and C) of raising audit concerns?

[spacepup | 2,404]

There isn't really great info out there about audit concerns, but what I can share from personal experience:

* People think the IRS is a lot more sophisticated than it truly is in terms of audit concerns.  Having a Schedule D on a return, in my experience, has not increased risk.  What typically increases risks, is deducting huge losses, especially year after year, whether that is Schedule C or Schedule D.  I guess I'd say multi-year losses on Schedule C is probably 'more' of an audit risk (albeit still somewhat small), than the other items.

* If you receive a 1099-K or other 1099 reporting income, you have to report it somewhere on the return.  It isn't per se audit risk, but their system will catch the discrepancy at some point if it is a material amount, and you'll receive an automated notice.

* Unless these numbers are truly substantial, I wouldn't be massively concerned about getting audited, especially if the rest of your return is pretty straightforward.  If you are reporting all your income in some fashion, and have reasonably good records, you should mostly be fine.

 

[arch_8ngel | 1,597]

Yeah, I guess I should caveat this with "assume that a person will still end up with a net-positive income from the selling activity" (i.e. no losses that exceed gross receipts)

[arch_8ngel | 1,597]

3 minutes ago, spacepup said:

 

* Unless these numbers are truly substantial, I wouldn't be massively concerned about getting audited, especially if the rest of your return is pretty straightforward.  If you are reporting all your income in some fashion, and have reasonably good records, you should mostly be fine.

 

Define "substantial"

(and "straightforward" )

 

[spacepup | 2,404]

By substantial, I suppose it's sorta relative to the return when I say it that way.  I don't think there's a hardline number I'd focus on.  I guess what I'm saying is, if we're talking like under a couple thousand a year, I probably wouldn't worry too much about audit risk or stressing about this.  If we're talking over 10,000 a year, I still wouldn't 'worry' about audit, but I'd def take a little more care in keeping all my ducks in a row with documentation, etc.

Regarding straightforward, I just mean, if you don't have anything weird or crazy on the return.  Like a big farm loss, multi-year business losses, etc etc.  

If you are making a solid effort to report all your income, and make a due diligent effort to do a good job and keep records, I think that will be very satisfactory for a huge majority of people.  

What I see far more commonly than a full blown audit, are IRS notices addressing particular issues (like a 1099 with no income on the return, etc.).  They still do them of course, but full audits are very uncommon, especially for the 'average' person without a very complicated return, etc.

[B.A. | 1,139]

37 minutes ago, spacepup said:

(Group B - Collectible Sales) - if you are just "cleaning house" or selling off some of your collectibles, and it's not really a regular or continuous thing, I would *personally* report this on Schedule D as collectible sales.  They are nonbusiness capital-type assets.  You can report your cost basis for each sale to offset the proceeds, and thus only be taxed on the gain.  You cannot deduct sales that are losses (sold for less than you paid) - those would be nondeductible personal losses unless you can prove it was a purely investment vehicle.  Games from your collection would probably not meet that criteria.

I get those are the rules, but practically speaking I don't understand how that can work.  I usually don't sell much, but say I sell $950 worth of stuff, a bunch of random items, say 50 in total.  Most of this stuff I have had for years if not decades.  How on earth am I supposed to know, let alone prove how much I paid for a strategy guide in 2003?  If the initial cost can't be proven am I stuck paying tax on that entire $950? 

[spacepup | 2,404]

1 minute ago, B.A. said:

I get those are the rules, but practically speaking I don't understand how that can work.  I usually don't sell much, but say I sell $950 worth of stuff, a bunch of random items, say 50 in total.  Most of this stuff I have had for years if not decades.  How on earth am I supposed to know, let alone prove how much I paid for a strategy guide in 2003?  If the initial cost can't be proven am I stuck paying tax on that entire $950? 

Ok, here is what I would say to that.  Obviously perfect documentation and receipts for everything is ideal.  However, if I didn't have that, I would try to recreate to the best of my ability what my costs were, and keep that information orderly.  For example, we have pricecharting - it's not perfect, but it's a start.  It doesn't "prove" it's what you bought something for, and it could theoretically be disallowed, but I would make a diligent effort and try to honestly put together what I think my purchase costs were.  

If the effort is reasonable and the numbers are reasonable, I don't think most people would encounter issues.  I'm not going to ever guarantee it couldn't be disallowed, but, I've worked with several auditors before who accepted reasonable reconstructions that appeared to be honest and legitimate.  If they are experienced, they can probably tell if it's total BS or manipulation, based on working with the taxpayer.

I'm not suggesting people make up numbers, but I'm saying, if you don't have perfect info, try to put together the next best thing, and I would personally use that as my basis.  If questioned (again, low risk to begin with), I would provide that info and make my case.

Depending on someone's comfort level, if they just don't want to deal with that in any capacity at all, then sure, you can always report the total amount and not worry about it.  All about how much that time is worth it to you.

 

[/usr/bin/brian | 2]

My state has required the 1099-K for the past 2 years.  I've had to file it due to some marginal Ebay sales.  I haven't ever actually made money on the items, AKA I always sold them for less than I paid for them.  It's been relatively easy to add them to my return and the appropriate information that they were basically "garage sale" style items.  Had I made money on them I would have had to pay taxes on the difference.

It certainly stinks but I haven't had any major issue with it.

[Tanooki | 4,932]

Wow the details are good here, deep unless you really get tax law which a couple clearly do.

I take it, basics put, use this year right now, get rid of anything you're pretty sure to certain you want gone, yet keep it under 20K.

Otherwise, the question would be to the experts, what are the best methods to pay the asinine taxes they're lumping on us now so we don't get our refunds ruined?  I'm seeing a mountain of stuff I'm chipping away at, not sure I can kill it all off this year, so it leaves me with that question as a concern.  For all I know, there isn't one, maybe ebay will under the rules collect and submit ALL tax and other vendors will too, perhaps a nude from the IRS so they can be sure to get all their ill gotten goods.  But if not, is there a secure website one could say, monthly, login and using their routing/checking give the IRS what they want so they go away?  I mean they already have the access for refund/dues using turbo tax as it is through e-filing.