Updated Tax Information is in red
I've been reading this forum way longer than I've been a registered member, and based on the vast number of posts the previous spring, I thought I would provide a guide to those members who engage in quite a bit of selling activity during the year. This post is not intended for those members who only occasionally engage in selling activities; this is meant for those who sell on a regular basis or own an eBay store, etc.
Disclaimer: Everyone's scenario is different. The below responses are very generic and cannot be used as legal advice. This is only meant as a guide to inform you on matters that you may need to be aware of. Please seek advice from a tax professional and not just somebody on an internet forum that may have the CPA acronym in their handle.
I received a Form 1099 from Paypal; what do I need to do?
A Form 1099 reports to the IRS income that an individual or business paid to another for services or goods. There are certain thresholds and other requirements in which a Form 1099 is required to be filed by the payor. The payor must send one copy of the Form 1099 to the IRS and send another copy to the payee. If you receive a Form 1099, the IRS has you on file as receiving the amount of income (note that this amount is income only and does not include any expenses and other fees involved with producing this income - see below for more details) that is disclosed on the Form 1099. If you do not report this income on your tax return, either Form 1040 (Schedule C) for individuals or Form 1120 for incorporated businesses, you will most likely trigger a red flag in the IRS database and the IRS will undoubtedly send you a notice replete with penalties and interest. The IRS is always willing to work with taxpayers who are proactive; failing to report the income from a Form 1099 that you received is not being proactive.
I did not receive a 1099, but I sold cards throughout the year; do I need to report the income on my tax return?
Yes; any sales that an individual or corporation transacted during its reporting year should be reported on that entity’s tax return. Just because the amounts from the sales did not trigger a Form 1099 filing requirement, the IRS requires you to recognize the income on your tax return. You can take the chance that the IRS will never find out that you sold cards on the side, but if you are caught, the IRS can press charges that you evaded your civic duty of paying taxes which could result in a felony conviction. As an FYI, the key word in the previous sentence is evaded; tax evasion is illegal, tax avoision is legal.
When should I expect to receive a Form 1099 if I am to receive one at all?
If you do not receive a Form 1099 by the end of February, chances are you are not going to receive one. The Forms are due to the IRS by the end of February and should be postmarked to the recipient by January 31st. If you think you should receive one and don’t, you should probably be reporting the income anyways.
How will I know if I am supposed to receive a 1099 from Paypal?
As the holder of your account, Paypal must follow the guidelines under IRC §6050W which states that they must issue a 1099 to any account that exceeds the following two thresholds: 1) US$20,000 in gross payment volume from sales of goods or services in a single year, and 2) 200 separate payments for goods or services in the same year. These rules differ from other 1099 reporting requirements for payments to non-corporations, so the above rules only apply to Paypal and other similar service providers.
Can I only report the amounts on the Form 1099s I received and not from other sales?
No; see the second question. The only difference between the amounts on the Form 1099 that you received and the amounts from the other sales is that the IRS has a record of your sales from the Form 1099 that was filed, but not necessarily so for the amounts not reported on a Form 1099.
Do sales that I conduct on Blowout and COMC count as taxable income?
Yes; any amounts, both monetary and other tangible property, that you receive in exchange for cards should be disclosed on your tax return. Your sales on COMC will be counted once you request the income to be transferred to your bank account less the 20% COMC cash-out fee.
If I trade cards, do I need to report anything to the IRS?
Chances are that if you trade cards for other cards on the B/S/T forum you will probably not need to report anything to the IRS as long as monetary value was not exchanged in the process. This falls under the rules of a like-kind exchange and is beyond the scope of this post. If you do a lot of this involving monetary compensation, you should probably discuss with your tax preparer; if you don’t I would not worry about it.
Why am I being taxed on the amount of sales I have?
You aren’t. If you are, you are doing it wrong and should probably seek professional advice. Chances are, if you are selling cards to help pay for purchasing other cards, you will have losses each year. While Form 1099 only reports gross sales that you received, it is up to you to report any costs associated with the sales. See below for what type of costs you can deduct in relation to your sales.
I sell cards to help offset the costs of busting wax (i.e. I’m not a brentandbecca); why do I need to be taxed on the sales?
First off, please read the previous question; secondly you should be taxed for the same reason you need to report the amount you received in interest from a bank for keeping your money in a savings account. The IRS contends that you benefited from infrastructure that the government provided, and you should remit a portion to the government for their services.
What kind of expenses can I deduct in relation to the cards I sell?
These expenses would be costs incurred in association with the listing and final value fees on eBay, Paypal fees, COMC fees, and shipping costs – both actual postage as well as envelopes, toploaders, etc. You are also allowed to deduct the cost that you incurred to initially acquire the card. This does not mean that you can deduct the cost of a box purchased from Blowout if you only sell a handful of cards from the box. You should allocate the cost of the box among all of the cards that came in the box.** Example: I purchase a box from blowout for $100 shipped. If the box contains 100 cards, the cost per card is $1. I sell 15 cards for $30 on eBay. eBay charges me $3 in total fees and Paypal charges $1 in fees. It cost me $2 to ship the cards. In this example, the total cost of just the cards sold is $15 (15 cards * $1 per card). On your tax return, you would show $30 of sales, $15 of costs associated with the items you sold (also known as purchase costs), $4 of selling fees ($3 from eBay and $1 from Paypal), and $2 for shipping. In this example, you would only be taxed on $9 of net profits ($30 less the $15 purchase costs, $4 in selling fees, and $2 shipping). If you are an individual, all of this would be disclosed on Schedule C.
**There are other methods you can use to allocate the costs of the box among the cards; this would be a good discussion to have with your tax professional to avoid paying unnecessary taxes (keyword being avoid – see last sentence of question 2).
How should I account for expenses associated with COMC, if I only report the income when I cash out?
My suggestion, and this is strictly my own personal opinion, is to treat any payments to COMC (through the "Add Funds" link in your portal) as an expense. This way, you will not need to track any and all grading fees, promotional fees, submission fees, cash-out fees, etc. This counts for only expenses that you pay out of the COMC portal. However, this means that any cash you transfer out of COMC will count as income. Other power sellers may have different suggestions, and I would be open to their opinion.
Can I deduct the cost of driving to the post office or other places to buy supplies?
In a way, yes. The IRS will allow you to take a mileage deduction for business trips.
For 2013, the mileage deduction was 56.5 cents per mile. If you elect to take this deduction, you forego all other expenses associated with the vehicle such as gas, insurance, maintenance, etc. It is far easier to take this deduction than to keep track of your business miles vs. total miles and factor in the total cost of the vehicle (excluding your car payments) based on the percentage.
The business mileage deduction for 2014 is 56.0 cents. You can document your trips by keeping a travel log. The log should contain the date of the trip, the beginning and ending mileage from your odometer, and the business purpose of the trip. If you commingled your business trip along with a stop at the grocery store or to pick up your kids, the full trip doesn't technically count as a business trip.
Can I deduct expenses associated with my computer, internet, office, etc.?
Chances are no. This is a gray area in taxes and one should take a conservative approach to deducting any expenses associated with the above. If you are a casual seller, chances are you will already be in a loss position and will not need to deduct these expenses. If you are an avid seller, you may want to consult a tax adviser if you have net income before these deductions. In most instances, you use the same computer and internet for recreation as you do for selling cards. If you do not have a separate area in your place of living and you do not adequately document the differences between what is business and what is for casual use, I would not advise you to tempt the IRS to audit you. A few years ago, the IRS started looking into individuals taking large deductions on these types of expenses on their Schedule Cs. Again, if you think you can, please consult with a tax professional.
The IRS has now released a home office deduction safe harbor for 2013 and future years. Safe harbor means that if you apply this method in determining your home office deduction (assuming you used the correct square footage allocation, the IRS will not contest the amount of the expense - for the most part). For 2013, the Safe Harbor method will allow a person to expense $5 per square foot of qualified business use home office space up to 300 square feet. If you would like more information, talk to your tax advisor or you can read the actual Rev. Proc. 2013-13 issued by the IRS in regards to the Home Office Safe Harbor Method here:
http://www.irs.gov/pub/irs-drop/rp-13-13.pdf.
What can I do when I do not receive a receipt for my purchases?
Whenever possible, get a receipt. In absence of those, I would write your own receipts for your records and keep any other form of proof you can obtain that would also document the purchases.
What happens if I do not report the amount of sales I had during the year?
If you received a Form 1099, chances are you will receive a notice from the IRS stating that you owe taxes on the amount reported on the Form 1099 plus penalties and interest. It would then be up to you to prove that you had documentation of expenses associated with the income to reduce the amount of taxable income. By this time, the IRS will take a long look at your records and may disallow these expenses. If you did not receive a Form 1099, the IRS may still have some documentation showing that you should be reporting income; it is up to you whether you want to be in compliance or face possible felony charges.
What is the difference between treating my income as associated with a Hobby instead of a Business?
If you have net income during the reporting year (your sales were greater than your expenses) there is little difference (other than were you report your expense); you will be taxed on the net income. If you have losses during your reporting year (your expenses are greater than your sales) there are differences. If you treat this as a hobby, your expenses will be limited to the amount of sales you had (For example: I had $100 of sales and $200 of expenses; I can only deduct $100 of the expenses resulting in $0 of taxable income – I will not be allowed to recognize a $100 loss lowering my overall taxable income), and the expenses will be reported on your Schedule A under miscellaneous deductions subject to 2% of AGI (the number found on the bottom of page 1 of your Form 1040). If you treat this as a business, you would report your expenses on Schedule C, and you may be allowed to recognize the losses that were disallowed in the previous example. However, if the IRS deems that you are not legitimately seeking to make a profit, they can rule that your business is actually a hobby and disallow those losses. The general rule of thumb is that you need to show income or profits in at least 3 of the previous 5 consecutive tax periods. This rule is for unincorporated businesses only. If you feel like you are being hosed by the IRS, please consult your tax advisor.
What is a Schedule C and how do I prepare one?
Schedule C is used to report income that you received in association with an unincorporated business. If you purchase tax software, you can prepare this form yourself. Schedule C is usually not provided on the free online tax providers such as Turbo Tax. All you need to do is follow the rules on the following 11 pages of instructions:
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf. If you can follow along, good for you; if you can’t, please consult your tax adviser.
What do I do if I expect I will owe at least $1,000 (or $500 if incorporated) in taxes from all this additional income I am reporting?
If you, as an individual or unicorporated business, expect you will owe $1,000 in taxes above and beyond any withholding from your paychecks, you should make quarterly tax payments to the IRS using form 1040-ES. These payments are due 4/15, 6/15, 9/15, and 1/15. Before you make any payments, it's best to talk with a tax advisor as they can run through your projected income and deductions to limit any payments you may have to make. If you want some light reading on the subject, you can read the instructions for 2014 here: http://www.irs.gov/pub/irs-pdf/f1040es.pdf.
If you are an incorporated business, and expect to owe at least $500 in taxes for the year, you can make quarterly tax payments via form 1120-W. These payments are due on 4/15, 6/15, 9/15, and 12/15. Before you make any payments, it's best to talk with a tax advisor as they can run through your projected income and deductions to limit any payments you may have to make. If you want some light reading on the subject, you can read the instructions for 2014 here: http://www.irs.gov/pub/irs-pdf/i1120w.pdf.
I donated a bunch of cards to a local charity; can I count the Beckett BV as the amount of the contribution?
The IRS will allow you to deduct an amount based on what they call a "thrift shop" value. This is the price that you would expect to pay for your items if you found them on eBay, in a flea market, or other 2nd hand stores. Keep in mind that even if Beckett values each card from the 1987 Topps set at $0.05 a piece, they still value the complete set at around $10 which does not equal 5 cents a card. If you plan on recognizing more than $250 of donations on your contribution, you will need a receipt. The receipt should include the name of the charity, the date of contribution, and a description of the items donated. The receipt will not contain a value; it is up to you to determine that and have support in case of an audit. While that threshold is $250 per donation, not all donations in total, it is still best to always request a receipt.
What is the difference between an incorporated business and an unincorporated business?
An unincorporated business is a privately held business that is usually not associated with a state jurisdiction other than for personal income tax purposes. An incorporated business is one which has been registered to do business with a state jurisdiction and is subject to state and federal corporate rules. An unincorporated business generally reports income on the owners Form 1040 Schedule C; an incorporated business generally reports income on Form 1120.
What are the chances that I get audited by the IRS?
It depends. If you receive a Form 1099 and fail to report the income, your chances are high. If you don’t, you may get away with it. Something you should be aware of is the IRS’s statute of limitations. If you disclose your income to the IRS, the IRS generally has three years from the date the return is filed to change or audit your return. This only applies if you actually file a Schedule C. If you do not file the return, the statute of limitations will not apply as you have yet to file the Schedule C. This applies even if you filed your Form 1040. While Schedule C is filed with your Form 1040, it is considered a separate schedule with its own statute.
In the future, what can I do to help keep track of everything?
If you conduct a lot of sales and are highly organized, a simple excel spreadsheet would suffice. If not, you can keep all of your receipts and Paypal printouts and provide them to a tax advisor to tally for you (we really enjoy this, by the way). You can also purchase accounting software if you have a lot of sales; I mean a lot.
If I use a tax service, what should I provide?
You should provide them with a copy of any Form 1099s that you may have received along with any documentation, such as an excel spreadsheet, of other income and associated expenses. You should have this documentation anyways even if you prepare your own taxes in case of an IRS audit.
I’m thinking of going into the card business; what should I do?
First, good luck. Second, consult with a tax adviser. If you decide to incorporate your business, there are state fees and issues that you will need to deal with. If you decide to leave it unincorporated it is still advisable to consult with a tax adviser in order to better plan your business.
Should I be collecting sales tax on instate sales?
If you are an incorporated business, yes. Each state's law is different, but most require you to register and obtain an ID number to collect and remit sales tax. The good news is that this collection does not count as income, and the remittance to the state does not count as an expense. If you are an unincorporated business, the answer is maybe depending on your state; Texas does require a sole proprietorship to collect and remit sales tax, but that is as far as my knowledge goes. It is worth your time, if you have substantial sales, to Google your state along with the words "sales tax" and look for a link that takes you either to that state's Department of Taxation or Comptroller's Office to see if they require unincorporated businesses to comply. If you are treating your sales as a hobby, the answer is even more of a maybe. Some states have a "garage sale" rule where no sales tax needs to be collected, but I am unaware as to where the line is drawn between a garage sale and a hobby sale; it might be worth your while to contact one of the information hotlines on the sales tax website you look at to see if you may be required to collect sales tax. You can probably get away with asking generic questions so as not to have your name on file with the state.
How do I know what my state requirements are?
Each state is different. Most (I would assume all, but I haven't checked) have useful information on their Department of Taxation or Comptroller website. While I have prepared plenty of business state tax returns in my public accounting lifetime, I am not well versed in each and every state nuance. A local CPA would be a valuable source for any specific state questions that you have, as they should have plenty of expertise in the state they live and work in.
What do I do if I receive a call from someone saying they are from the IRS?
It's a scam. The IRS will only make initial contact through the mail. If you are so inclined, ask for a call back number and as much information on them as possible (such as a name they are using, even if it is not real), and then make an excuse to get off the phone. You can report this scam to the Treasury Department here: Contact: IRS Impersonation Scam Reporting - U.S. Treasury Inspector General for Tax Administration (TIGTA). Never ever give out any personal information over the phone.
What do I do if I receive an email from the IRS?
It's a scam. The IRS will only make initial contact through the mail. If you receive an email, do not reply, and do not open any links or attachments. You may forward the email to phishing@irs.gov. After you forward the email, delete it.