PSA: Paypal sending 1099-Ks to MA and VT sellers

Feb 4, 2018

    1. Residents of other states in the USA, take note! This could happen to you in the near future!! :o

      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?
      Massachusetts: New reporting threshold law
      Vermont: New reporting threshold law
      IRS: Online garage sales

      Discussions elsewhere that I found helpful:
      Reddit discussion
      Stripers discussion

      (any good links others provide will be added here)
       
      #1 overlordu, Feb 4, 2018
      Last edited: Feb 5, 2018
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    2. I'm not sure if it's the same in the USA, but here in Canada the sale of personal property does not count as income because it's transforming assets (items) you already own into another form (money). That might be something you can look into?
       
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    3. I'm an income tax preparer in California, so I may be able to help some! A 1099-K is just another form on income, nothing to be alarmed about. All 1099 forms are for income from business sales. In the US, even if you sell something that is your own property, it counts as income if the item is over a certain amount. Most people, however, do not use 1099 forms unless they are issued by a company, such as paypal. Example: someone having a yard sale isn't going to report their money made from the sales. You should still include it with your tax documents when filing, because it may affect your return/amount owed. If you're filing on your own, there should be a section that asks about other forms you may have and you would have to answer yes to the 1099-K section. If you don't even meet the standard deductible, this 1099-K won't even affect you. Also, even if you don't meet the standard deductible, you still most likely want to file to get back any withholding that was taken from your check. The only time you don't want to file is if you have only non-taxable income, such as only receiving disability or retirement.

      Feel free to ask me any questions! I only really know California taxes, but many things are universal to other states and I'd be more than happy to look up info on taxes in other states.

      Forgot to add in a bit! >.<

      Being that a 1099 form is a business form, you are allowed to include expenses that will be deducted from this amount. Say you made $10k, but if that you had to pay $2k in expenses such as gas, shipping fees, etc. That means your profit is brought down to $8k. You would have to specify what those expenses are for. Also, if you have gas expenses, you can do it one of two ways. By the mile or by the gallon. You MUST pick one and once you do you have to keep using that one if you keep reporting business income.
       
      #3 Cap'n, Feb 4, 2018
      Last edited by a moderator: Feb 5, 2018
    4. What a pain in the butt. I got the form also.
       
    5. 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... :shudder
       
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    6. Thank you for telling us! I have to check out my PayPal because I didn't got any of this :(
       
    7. I got mine two days ago in the mail. Yours may be arriving...
       
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    8. Thank you so much! I will keep an eye on it :) I don't sell a lot but hm...
       
    9. If you had 600.00 or more in payments, in your account as a none personal payment in the last year.
       
    10. 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).
       
    11. I think the problem is it is already reported that is why we have the paypal tax form! where that statement is if you are wondering IF you should report these things...
       
    12. 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!!!
       
      #12 overlordu, Feb 5, 2018
      Last edited by a moderator: Feb 6, 2018
    13. Ohhh, boy! You might have to amend. I'm sorry you're going through this.

      I'd ask/pay a tax professional (quickly!) in your state before I'd ignore a government tax document. The IRS has great powers to come after people: freezing accounts while they investigate, etc. They can audit your tax returns for - what - 3 years? if they think you made an innocent mistake. Or audit the last 7 years if they think you're a tax scofflaw.

      Please act on this quickly. As tax season heats up, some tax experts will refuse to take on new clients until after the deadline for filing taxes. If your tax return is even a little bit complicated, you might want a tax preparer to do your taxes every year.
      (I pay a tax guy every year. It's worth the peace of mind.)
       
    14. @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. :thumbup

      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. :shudder
       
      #14 overlordu, Feb 6, 2018
      Last edited: Feb 6, 2018
      • x 1
    15. Yes, you'd be helping out a lot of people if you could report back on what you find out on these 1099-Ks.

      I've used eBay as a garage sale and I'd be beyond appalled if I had to pay income taxes on things I sold at a loss!
       
    16. Some of the things I have sold on ebay have been over ten years old and I don't have proof of original price. I wonder how that works. Can you imagine if you sold for example beads and lots of very low priced auctions having to account for every sale and have backup proof of the cost of the item. Or if you inherited the items. It's going to get stupid fast and who will be reading all this stuff!
       
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    17. 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). :/

      This weekend I'm planning to write up a very detailed, in depth explanation and guide for all of this! Should I just add it to this thread, or put it in the tutorial section? Or both? XD I want this information to be easy to find. I can just imagine future young doll collectors who aren't experienced with taxes freaking out about this!
       
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    18. THANK YOU VERY MUCH for your update! I appreciate it!
      I would add your follow-up to this thread. You can ask a moderator if it's suitable for a tutorial. (I wouldn't know what to tell you.)
      THANK YOU! Sorry you had to go through this!
       
    19. YIkes and scary!!!!!
       
    20. I wrote up my little guide, but it's too long to post. LOL. I'm waiting to hear back from the mods about putting it in the Tutorial section, but if they say no I guess I'll just post it here in two parts. :lol: