Big tax changes will affect guitar sellers and parts resellers..

Discussion in 'Fred's Barcalounge' started by englishman, Sep 24, 2021.

  1. gretscher09

    gretscher09 Electromatic

    Apr 18, 2009
    I can’t believe this hasn’t come up before. For some states in the US the $600 threshold has been in effect for a couple of years. I have first-hand experience that the IRS considers the amounts on 1099Ks as reportable income. It is a complete mess and an accounting nightmare. For example, say you bought a used guitar several years ago for $2000 and just sold it for $2000 thru Reverb or Paypal. Therefore, no profit or gain. But the IRS considers that $2000 as taxable income. And it gets worse. If the person you sold it to lives in a state with a sales tax, say 5%, that is $100. And you charged a shipping fee of $100. So the amount the buyer paid Reverb or Paypal is $2200. That is the amount that appears on your 1099K (not the amount they sent to your bank account) and is the amount you will be expected to pay income tax on. I kid you not. But you didn’t actually receive $2200 – not even close. You never saw the $100 sales tax – Reverb and Paypal handle that directly. Your shipping costs were the $100 that you charged. And then there is the up to 10% selling fee from Reverb and Paypal that could be $220. So you might have actually gotten $1780 deposited to your bank account. But the IRS expects you to pay income tax on the reported $2200 even though you didn’t even make a profit by selling the guitar. Totally not right.

    And then there is the question of why any of that is considered income? You are selling a guitar that you bought a few years ago. It was not gift, you paid $2000 for it. You are simply getting some money back for something you previously paid for. But with this bizarre 1099K reporting requirement the IRS expects you to pay income tax on the entire sale amount even though you might not have made any profit. If you sell a car or any items for more than $600 through a reporting system like Paypal, Reverb or Etsy you will get a 1099K and be expected to pay income tax on the total sale amount (even if you sold it for less than you paid for it). This is like a sales tax the seller pays and could be 15-30% or more depending on your Federal tax bracket.

    The only way to report the correct income or loss is to declare you are in business and report the 1099Ks on an IRS Schedule C where you can deduct the fees, and the amounts you never received. The IRS hobby rules have also changed so you can’t deduct any of your hobby expenses to offset the income shown on a 1099K (but you still have to report and pay income tax on the 1099K income). In the case above, using a Schedule C, you show the 1099K $2200 as business income and deduct the sales tax, shipping cost and selling fees totaling $420 for a net of $1780. But your original cost of goods sold (the guitar) was $2000, so what you really have is a loss of $220 which will now reduce your taxes owed on other income. I didn’t mind buying, trying, and selling guitar equipment even if I sold some things for less than I paid for them, and didn’t mind not deducting the loss on my income taxes. But now having to pay income tax on the total sale amount is ridiculous. So I am forced to say I am in business and use the Schedule C. As others have said, you prolly have to show a profit every couple of years for the IRS to accept you are in a business.

    Again, this is totally absurd, an accounting nightmare and gigantic waste of everyone’s time, including the IRS. This is not a theoretical situation; I am in the middle of dealing with the IRS on this issue, but the IRS never reviews or responds to what I send them - while their computers send out even more threatening letters. Be prepared, the law phases in to all states next year. And contact your Federal representatives to express your feelings about this absurd law. A simple solution would be to go back to allowing hobby expenses, costs, etc, be subtracted from any hobby income, even if it doesn’t allow losses to be deducted from your income tax.
    Last edited: Sep 26, 2021
    pmac11, juks and englishman like this.
  2. juks

    juks Country Gent

    Nov 26, 2020
    Fremont, California
    You solution would be perfect. I'm guessing this was created to address individuals who have been deducting all hobby costs when there is close to no income.

    But as happens most times with tax code changes, it goes from the frying pan into the fire.

    I would love to deduct all my music purchases from my work income :D
  3. juks

    juks Country Gent

    Nov 26, 2020
    Fremont, California
    Yes, if you sell guitar you paid $2000 at $1800, there is income but not net income. Rather a loss. So I'd like to know what they mean with income. If you can prove a loss, or smaller profit than the entire sales price, would they accept that? I guess I need to ask the tax guy when I see him next year.
    pmac11 and speedicut like this.
  4. speedicut

    speedicut Friend of Fred

    Jun 5, 2012
    That's a good question juks..
    The last few months of my online business I showed a small loss - I had some bank and PayPal fees along with some dues and subscriptions and had no income showing... but I had been running a profit most months for the previous two years so that loss went against my previous income.
    One thing is for sure - if and when this passes and takes effect, the people it affects probably won't be doing their own taxes any more...
  5. Chet Harrison

    Chet Harrison Gretschie

    Apr 27, 2020
    Or, hear me out, people who didn’t give a rat’s ass about paying taxes before now will continue to not give a rat’s ass about paying taxes in the future— They will get a 1099K in the mail, throw it in the bin, and hope they don’t get audited. And they most likely won’t. IRS doesn’t have the manpower.
    pmac11 likes this.
  6. speedicut

    speedicut Friend of Fred

    Jun 5, 2012
    There's a budget increase for them so they can increase audits and collections to help pay for the 3.5 trillion spending bill.
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