Paypal sending 1099-Ks to USA sellers who received over $600

At the time I made this post, it only applied to Massachusetts and Vermont. But in a recent stimulus bill, the law has been changed to affect all the states. If you've gotten a 1099-K from Paypal because of doll hobby sales, here's some basic information:

- If you receive over $600 in Paypal payments via "Goods and Services", Paypal will send you a 1099-K form that includes ALL "Goods and Services" payments you received that year. They will also send a copy of that form to your state's Department of Taxes. (Not sure if they will send it to the IRS, because afaik the federal threshold is $20,000?)

- If your secondhand doll sales earned you a profit, you are supposed to report that income on your taxes!

- If your secondhand doll sales did not earn you a profit, then it is not taxable income.

- Your sale was profitable if: the total selling price minus fees and minus shipping is more than the price you bought it for plus shipping you paid.

- Our predicament is that most doll sales are not profitable, and thus not taxable income. You are not supposed to report it on your taxes. However, since Paypal is sending out these 1099s, it might look suspicious to the Department of Taxes.



ORIGINAL POST:

Yesterday I received a 1099-K tax form in the mail from Paypal. As you can see here, Paypal is required to send 1099s to the IRS if a person receives over $20,000 AND receives over 200 payments in a year. However, this rule was recently changed in Massachusetts and Vermont laws, whose sellers only have to make $600 to trigger a 1099. Payments received as "Friends and Family/personal" do NOT count, these are only payments marked as "Goods and Services".

What this means for MA and VT residents is that if you sold your dolls or accessories secondhand totalling more than $600 last year, and accepted the payments as "Goods and Services" (which you should, per the Paypal user agreement), that money will be reported to the Department of Revenue in your state. Supposedly Paypal is not sending these 1099s to the IRS, because the federal threshold is still $20,000. But the 1099 you receive will be a federal form, because apparently Paypal was unprepared for this and didn't have the state forms available.

If you live in Massachusetts or Vermont and know you sold more than $600 worth of stuff, you will get a 1099-K if you haven't already! You can also check it on your Paypal account: Activity > Statements dropdown > Tax Documents. (Though it's worth noting that mine is empty, even though I got a 1099 in the mail!)

Anyways, I was incredibly alarmed by this and I am still not 100% sure how to proceed. I am trying to research this, but I don't fully understand it. It seems that any sales on which you did not make a profit should not be taxable income. I assume that most secondhand doll sales did not make a profit, so perhaps you should not report any of Paypal's numbers on your tax return? (If you DID make a profit, by reselling a limited doll for example, I think you definitely need to report it!) However, the Department of Revenue may contact you and you'll have to prove with receipts that you did not make any profit on those sales. In the worst case scenario, you might have to pay a penalty for failure to report the sales... it's a little scary, to be honest.

If anyone would like to offer thoughts, experiences, or advice, please do!! I'm sure I'm not the only user on DoA who got freaked out by this. *I acknowledge that for REAL tax advice, one should go to a tax advisor or a CPA.

A few links:
Paypal: Will I receive tax form 1099-K? (includes list of states affected)
Massachusetts: New reporting threshold law
Vermont: New reporting threshold law
IRS: Online garage sales
Added 2021: Stimulus Bill Requires Payment Processors (like Paypal) To Report Earnings of $600+ on 1099-K Tax Form

Discussions elsewhere that I found helpful:
Reddit discussion
Stripers discussion

(any good links others provide will be added here)

 

Thanks for your comment! I guess the part I don't understand the most is if selling secondhand stuff really counts as a "business" sale. The 1099-K I got from Paypal includes every single payment I received as "Goods and Services" - which for me, falls under two categories: Original artwork that I sold through my online shop (which I filled out a Schedule C for), and dolls, eyes, clothes, etc that I sold secondhand on DoA because I didn't want them anymore. Me selling artwork is obviously for profit and it's definitely a small business. But any doll items I sold wasn't a business venture... I never make a profit on them. I read in several places that this kind of money doesn't count as income, since I did not make a profit and I wasn't doing it in order to make money in the first place (like people who buy cheap stuff at thrift stores for the purpose of reselling on eBay). These people say you don't have to include the sales of used, unwanted stuff on your taxes, but if you get contacted about it all you have to do is provide the original receipts to prove you didn't make any profit.

I'm so mad that Paypal didn't notify their users in Vermont and Massachusetts about this. The federal reporting threshold is a whopping $20,000! The average person selling their old unwanted stuff would never reach that amount, so the fact that I had no warning and suddenly have to deal with this extra tax form is what distresses me...

 

Ooh, look at this page I just found! Tax Tips for Online Auction Sellers | Internal Revenue Service

From the IRS' own website! I'm feeling much better now just seeing that little blurb. Now I need to find the equivalent statement on a Vermont website in order to truly relax (ugh, all of VT's sites are garbage).

 

Well, Paypal is only aware of the money you received- they don't know what you paid for the items you sold, meaning that Paypal can't determine if your sales were profitable and therefore taxable income. I think Paypal is required to send out 1099-K's in order to catch people who are purposely avoiding taxes on their capital gains... but if you don't have any gains (because everything you sold was at a loss), then the money isn't taxable income and there's no need to report it yourself... I think? Maybe??? I've been reading sooo much about this in the past 24 hours and there is some conflicting information. But most places agree that if you're just selling your old stuff and don't make a profit on it, then that is NOT taxable income and doesn't need to be reported. That's why the federal reporting threshold is so high- if you made $20,000 in a year, you're probably not just selling your old stuff.

But anyway, it doesn't solve the problem that Paypal has brought attention to us with this form and even if reporting that stuff is unnecessary, they don't know that yet so they'll try to penalize you or do an audit. Maybe the thing to do is file a Schedule C as a Hobby. Put in all the money you made selling doll stuff that Paypal reported. Then on the expenses, include the original prices of the doll stuff. When you do it as a hobby, your expenses can't be more than your income, so when you max out your expenses it will bring the total income to $0, which isn't taxable. Or something like that? Ugh...

I would like to also whine that the main reason I'm so stressed about this is that I already filed my taxes like 2 days before I got the 1099. So now I have to either hope that they'll understand everything on the 1099 I didn't report wasn't taxable (since I DID report 40% of it as actual for-profit business sales)... or amend my return. Argh!!!

 

@Answer42, thanks for the advice. I've come to the same conclusion and will hopefully be speaking to a CPA soon! This current issue aside, my taxes are extremely simple so I am planning to amend myself, but I want a CPA to verify what I'm doing so I know there are no mistakes.

Once I've had a professional instruct me on how to deal with secondhand sales on the 1099-K, I'll be back here with the information, since it really is not entirely clear how or if we should report those unprofitable sales. Not many people have chimed in here yet, but I think that over the years, other states will lower their reporting thresholds and more users will get 1099-Ks for their secondhand sales... so hopefully whatever I find out will be useful for people in the future.

 

Not sure how many people are even watching this thread, but I have an update!

I was having trouble getting an appointment with a CPA, so I decided instead to call the IRS help line and I spoke to a woman in the Tax Law department. She was just as boggled as we are about being in this situation. She confirmed that the sales of personal items sold at a loss do not belong on a 1099-K. However, since Paypal filed it anyway, she said it would definitely be regarded as suspicious and if you do nothing about it, you would likely get a letter asking for an explanation of that income. You would then just write a letter back explaining the situation and they would be okay with it (this is literally what the IRS woman told me). Anyways, I had to amend my taxes anyway and I really don't want to get a scary letter from any tax people.

I was told that these sales can be reported on Schedule D form 8949, "Sales and Other Dispositions of Capital Assets". This is merely the best place to report the sales, because in truth they don't belong anywhere. The IRS does not care about any of your used stuff that you sold for less money than you paid. Anyway, form 8949 is divided into two sections, short term transactions (you owned the item for a year or less) and long term transactions. The information you need to enter is a description of the item, the date you sold it, how much you sold it for, the date you originally acquired it, and how much you originally bought it for. The IRS employee I spoke to told me that similar items can be added together on one line, with "various" written for the dates sold/acquired. I confirmed this on the instructions for form 8949. You do still need to separate out the short term from the long term.

Unfortunately, I was not able to lump my doll sales together using TurboTax because it would not accept "various" as a date, so I had to enter all my sales from last year one at a time! It wasn't terrible, just annoying. I'm not sure if other tax preparing software will allow "various" for the dates, but it may be worth looking into if you sell a LOT of stuff and don't want to itemize them all! And of course on the paper form you can still write in "various".

There is also the question of, what happens if you DID make a profit selling dolls? Well, that happened to me filling out the 8949, LOL. Since I had to itemize it, one of my sales had a $30 profit. All my other sales were at a loss, but that oneeee sale had to get taxed since I made money on it. The good news is that I only owed $1 in taxes for that $30 profit! However, if I had been able to put all my doll sales on one line, the losses I took on everything else would have been greater than the profit from that one sale. Oh well. If literally all your sales were at a loss, you will not pay any taxes on them at all.

Anyway... after all this research and talking to someone at the IRS, this situation is DEFINITELY messed up. It took a long time for the woman I spoke to to find a place to report the sales since they truly do not belong anywhere, and I can only imagine all the confused phonecalls they're getting at the Department of Taxes in Massachusetts and Vermont. I feel like one of the main problems here is that Paypal has no way to differentiate between payments you received that were true business sales for a profit, versus payments you received for your old stuff that you sold at a loss and was not a real "business" sale. Either Paypal needs to find a way to categorize the sales as profitable and un-profitable (and only the sales marked as profitable would appear on the 1099-K), or the government needs to create an additional tax form for the sale of personal items at a loss in the event that they're reported on a 1099-K ("online garage sales" as the IRS calls it). :/