Originally Posted by momosgarage
Let me paraphrase his points for you (this was not my original post, but was something I also thought of) and yes I understand how taxes are paid on "profits".
point 1 - if someone sells $20,000+ worth of household goods "at a loss" over the course of a year and is not a regular seller on ebay (basically a one time big 'monty hall' sale). What do they need to do? Considering that they likely will not have recipts for said $20,000+ worth of stuff accumulated over a lifetime. Do they pay taxes on items they took a loss on and were used, just because they hit the 1099 threshold?
point 2 - just because the federal government doesn't say you owe taxes due to losses, does not mean the state will accept the same conclusion. So, once again a person sells $20,000+ worth of household goods "at a loss" over the course of a year, but despite not owing federal taxes they can possibly still owe state taxes simply beacause the state says so.
What is a person to do in these to above scenarios? Since in the above cases it will not be someone running a business, even as a sole proprietor. I say this because selling a pile of stuff one year on ebay that was sitting in your house, does not meet the IRS's checklist for what constitutes a business.
That was the point of the gambling losses example. The IRS can say you owe just on your $2000 profit, but the State can say different, even with proof of what the IRS said. Also who says the IRS won't want taxes for the whole $20,000. What proof do you have otherwise if audited? You won't have a shoebox full of recipts to prove the original cost of the items.
This also doesn't address the IRS discounting write-off's for losses by simply saying ebay is a "hobby" and not a business. Hence the: "IRS's checklist for what constitutes a business"
Originally Posted by momosgarage
Any thoughts on the above?
I was not really looking at this because it was long and the points have been touched upon earlier in the thread, but I can again and I'll expand my explanation to show how to do it.
Point 1 - You aren't going to sell $20,000 worth of "household goods" throughout the year. Let's be realistic. 99 Times out of 100, if you have $20,000 in sales it's not personal property; you'd be a business. That's why paypal (IMO) got away with the 200/$20,000 limitation where it's $600 everywhere else.
That being said, let's say you have a rare instance where you sell a car on ebay, or you get in trouble and have to sell your personal belonings to pay for medical bills. Personal property is not taxable
. If I sell my clothes, there is no tax associated with that sale. You will get a 1099 from paypal. You will have to file a schedule c, but there is a spot in your software that will say "if you are reporting different income than what is on your 1099, put your reason here.
Point 2 - Same scenario.
Your take on hobby vs. business was also addressed earlier. You are in essence being penalized by having it classified as a hobby. You want it to be classified as a business so you can write off expenses, and you aren't subject to 2% limitation. If it's business, you take deductions on schedule C. If it's a hobby you take your expenses on schedule A - misc itemized deductions and only get the deductions if 1) you itemize, and 2) your misc itemization exceed 2% of your AGI. As far as whether you are a business or a hobby, there is no rhyme or reason - each case is separate. One person it can be a business, the next a hobby. The burden of proof is on your to show it's a business, not a hobby and not on the IRS. You have to prove your MAIN REASON is to make $, and that you don't get too much personal enjoyment on the side.