December 14, 2023

Understanding the 1099-NEC Form: A Complete Guide

If you’re new to being a self-employed taxpayer or you’ve hired an independent contractor for the first time recently, one of the first things you need to understand is the different tax forms you’ll be dealing with. In this article, we will focus specifically on IRS Form 1099-NEC, which details nonemployee compensation.

At a glance:

1099-NEC reports payments of at least $600 to nonemployees.
Nonemployee compensation used to be reported on Form 1099-MISC but now has its own separate form.
Payers should file Form 1099-NEC by Jan. 31 to avoid penalties.

What is IRS Form 1099-NEC, Nonemployee Compensation?

Form 1099-NEC, Nonemployee Compensation, is a tax form specifically designed to report payments made to those who aren’t considered employees. Freelancers, independent contractors, or those who are otherwise self-employed, may receive one or more 1099-NEC forms from clients detailing how much they were paid during the tax year. As a payer, you’ll need to file this form to comply with IRS rules. As a payee, you’ll need this form to correctly report your income when filing your income tax return.

Who needs a 1099-NEC form?

If you provide services as an independent contractor, freelancer, or self-employed individual during the year, your payers must send you a 1099-NEC form detailing your compensation if they paid you at least $600 during the year.

What is reported on a 1099-NEC form?

Nonemployee compensation refers to compensation paid to independent contractors who are not traditional employees. While employers will automatically withhold payroll taxes for employees, independent contractors will likely not have any taxes withheld from their pay. And if no tax is withheld from your pay, you’ll have to make those payments yourself each quarter.

Your 1099-NEC form simply reports the total amounts you were paid during the year from each payer. This form helps the IRS track income you receive outside traditional employee-employer relationships.

Here’s a breakdown of what information you’ll find on your 1099-NEC form:

The payer’s information: This is the information of the person who paid you. On the 1099-NEC, you’ll find their name, address, and taxpayer identification number (TIN), so you know who the 1099-NEC is from.
Your information: As the recipient, your name, address, and TIN will be on the 1099-NEC form as well. Your TIN can be your Social Security number (SSN) or your employer identification number (EIN).
Payment details:

Box 1: Here, you’ll be able to see your total nonemployee compensation.
Box 2: Your client will only check this box if they made direct sales totaling $5,000 or more of consumer products to you for resale.
Box 3: Box 3 is not used on 1099-NEC forms and should be grayed out.
Box 4: This box is for federal income tax withholding. If the payer collected any backup withholding from you, you’ll find that amount here.
Boxes 5-7: The IRS provides these boxes for convenience, but payers do not have to complete these sections, so they may be blank. If any state income tax was withheld, you’ll see that amount in box 5. Box 6 is for the state identification number, and box 7 records the amount of state income.

If you choose to file with us at TaxAct®, we can help walk you through reporting your 1099-NEC income on your federal and state income tax returns.

What’s the difference between a 1099-NEC form and a 1099-MISC form?

The 1099-NEC form is relatively new. Before its introduction, payers would instead report nonemployee income in box 7 on Form 1099-MISC.

While the 1099-NEC form focuses explicitly on reporting nonemployee compensation, the 1099-MISC covers a broader range of miscellaneous income types such as rent, royalties, prizes, awards, and other types of payments.

What is the reporting deadline for Form 1099-NEC?

Payers must file form 1099-NEC and send copies to recipients by Jan. 31 of the following tax year. This can be done by paper or electronic filing, and failing to meet the January due date can lead to penalties. Penalties for late or incorrect filing can be steep, ranging from $60 to $310 per form in 2023, depending on the duration of the delay and the negligence involved.

How to fill out a 1099-NEC form

Filling out an IRS 1099-NEC form as a payer involves several key steps to ensure accuracy:

First, gather essential information: your name, address, TIN, and the recipient’s details (name, address, TIN).
Next, enter the payment details in Box 1, recording the total amount paid to the recipient during the tax year for services rendered (if over $600). Make sure to report these accurately, as errors might trigger IRS inquiries.
In Box 4, input any backup withholding you withheld from the payment to the recipient, if applicable. You typically won’t need to fill out boxes 5-7 unless you withheld state taxes.

Once the form is completed, review it thoroughly for any errors or discrepancies before submission. Ensuring accuracy prevents potential issues with the IRS and avoids the need for corrections later.

Send Copy A to the IRS and give the recipient Copy B. Some state departments require that you send them a paper copy of the 1099-NEC form. If so, send Copy 1 to the state tax department.

To ensure an even smoother experience, try filing your 1099-NEC form electronically. The IRS allows you to e-file 1099 forms using their Information Returns Intake System (IRIS). This free service simplifies the filing process, allowing you to do so quickly and conveniently. You can request automatic extensions, and there is an option to bulk file. If necessary, you can also use this method to file corrected 1099-NEC forms.

The bottom line

The 1099-NEC form is vital for accurate reporting of nonemployee compensation. As a 1099-NEC payer or recipient, you should understand what gets reported on this tax form, the deadlines for filing it, and the importance of accuracy to mitigate any potential penalties and ensure a smooth tax-filing experience for everyone.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Understanding the 1099-NEC Form: A Complete Guide appeared first on TaxAct Blog.

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Capital Gains Tax Calculator

Use TaxAct’s capital gains tax calculator to estimate your potential capital gains taxes for the tax year.

At a glance:

Capital gains taxes apply to profits from selling stocks, Bitcoin, or large assets.
Capital gains can be short-term (sold within a year) or long-term (sold after a year).
Use our capital gains tax calculator to estimate your potential taxes.

If you sell stocks, Bitcoin, or a large asset (such as a car, home, or boat) for a profit, you may be on the hook to pay capital gains taxes on that income. Capital gains are broken into two categories based on the timing of their sale date. Short-term capital gains are assets sold less than a year from purchase. Long-term capital gains are assets sold more than a year from purchase.

Capital Gains Tax Calculator instructions

Part 1: Enter your personal details

Step 1: Select the tax year in which you sold the item(s).
Step 2: Select your tax filing status.
Step 3: Enter your taxable income excluding profits from asset sales. For most people, that is the same as your adjusted gross income (AGI).
Step 4: Enter your state’s tax rate.

Part 2: Detail each asset sale within the tax year

Step 1: Enter the purchase date and purchase price of the specific item. The purchase date can be any time up to Dec. 31 of the tax year selected.
Step 2: Enter the sale date and sale price of the same item. Make sure the sale date is within the tax year selected.
Step 3: Repeat for all asset sales within the tax year selected.

Capital Gains Tax Calculator

Frequently asked questions about capital gains

What are capital assets?

Any asset you own could be considered a capital asset. That includes your primary residence, cars, stocks, or bonds. There are some exceptions and exclusions such as home sales.  Couples that sell a home are excluded from paying capital gains tax on up to $500,000 in profit. Individuals can exclude up to $250,000.

What are capital gains?

When you sell an asset for a profit, that profit is generally defined as a capital gain. Conversely, selling an asset for a loss is known as a capital loss.

What is the difference between short-term and long-term capital gains?

As briefly mentioned above, the difference between a short-term and long-term capital gain is the amount of time between the purchase and the sale dates. Another way to look at it is the amount of time the asset was held by the owner.

Short-term capital gains include the profits on any assets sold one year or less from the original purchase date.
Long-term capital gains include the profits of assets or investments sold beyond one year of the original purchase date.

What happens if you have a mix of capital gains and capital losses?

When calculating capital gains taxes, you should first evaluate all short-term and long-term transactions separately.  For transactions within a given tax year, here’s a simplified version of how to start:

 Add all long-term gains and subtract all long-term capital losses.
 Add all short-term gains, and subtract all short-term capital losses.
If both long-term and short-term capital gains are positive, evaluate each separately against relevant tax rates.
If both long-term and short-term capital gains are negative, your capital gains tax is $0.
If the sum of your long-term and short-term gains is 0, your capital gains tax is $0.
If one of your long-term or short-term gains is positive while the other is negative, subtract the negative from the positive. Next, evaluate the capital gains tax on the remaining amount. For example, if your long-term gains are $1,000, and your short-term losses are -$500, you should subtract the loss from the long-term profit. Then, you can calculate the long-term capital gains tax on the remaining $500.

Capital gains tax tables

Like income tax brackets, capital gains tax brackets can be confusing and easily misunderstood.  And, under tax reform that went into effect in 2018, they were significantly adjusted in the past few years. Refer to the tables below to estimate your capital gains taxes.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

More to explore:

The Complete Definition of Capital Gains Tax
Turn Your Big Money Ambitions into Manageable Micro Goals
When Does Capital Gains Tax Apply?
5 Capital Gains Mistakes that Could Cost You

The post Capital Gains Tax Calculator appeared first on TaxAct Blog.

– ​Tax Tips and Tax Planning Resources | TaxAct Blog

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Online Seller 1099-K FAQs and Scenarios Explained

Updated for tax year 2023.

You’ve likely heard about the new IRS reporting thresholds for Form 1099-K that were supposed to go into effect during the 2023 tax year. As of November 2023, the IRS has postponed the threshold changes once again, and you will only receive Form 1099-K for 2023 if you hit an annual threshold of $20,000 in gross payments and at least 200 transactions.

In 2024, the $20,000 threshold will be lowered to $5,000 with no transaction minimum. This is part of a phase-in process by the IRS to eventually implement a $600 reporting threshold in 2025 unless the IRS makes more changes.

We know these changes and postponements can be confusing, especially when it comes to selling items online. To help you understand, let’s look at some common concerns we see from online sellers and how to handle certain unique situations, like selling inherited items.

How to calculate your taxable income from an online sale

You only owe income tax on the net profits you make from a sale. To determine your profits, you need to keep track of each item’s sale price and any other expenses related to the sale.

If you are a casual seller (not a business) and you sell a personal item for more than you originally paid, the profit you make is considered a capital gain. Capital gains are taxable income and must be reported on your tax return using Schedule D.

To determine your taxable gains when selling personal assets, you will need this formula:

Sale Price (what you sold the item for) – Cost Basis (what you paid for the product + any fees associated with the sale of the item) = Capital Gain (income reported on Schedule D)

Capital gains are taxed at different rates depending on how long you hold the item before selling it. If you held the item for a year or less, it’s a short-term capital gain taxed as ordinary income. If you held the item for longer than one year, it’s considered a long-term capital gain. Long-term gains are taxed at capital gains tax rates, which are usually more favorable than ordinary income tax rates.

If you’re someone who learns best from examples, we will go over some capital gains calculation scenarios farther down. First, let’s learn how to calculate your cost basis and what kind of documentation you need to keep just in case the IRS has questions for you.

How to determine your cost basis

To determine your item’s cost basis, you’ll need to know what you originally paid for the item and have some kind of proof to show the IRS in case they ask for it. Typically, your proof would be a receipt or other documented proof of what you paid for the item.

How do I determine my cost basis without a receipt?

If you acquired an item long ago and no longer have the receipt, there are other ways to prove your cost basis. Look for invoices, statements, written communications, purchase history in retail apps, even before-and-after photos of the item that can show any differences or improvements made since acquiring it. For instance, if you bought the item new and later sold it in used condition, photos of the item in its original condition can help you determine your cost basis in relation to its purchase price (and vice versa).

When substantiating your cost basis for an item, anything is better than nothing. There is not one specific method you must use when keeping records, but try your best to find some kind of substantial proof just in case the IRS decides to question you.

What if I can’t find documents showing what I originally paid for the item?

If you can’t provide proof of your cost basis, the IRS could argue that your basis is $0 and require you to report the item’s entire sale price as a gain.

If you estimate your cost basis to calculate any potential gains but have no proof to back up your estimate, the IRS could choose to deny your calculation and require you to pay taxes on a larger gain. Just know that guesstimates should be your last resort, and you should strive to find something substantial to back up your cost basis claims if you can.

Profitable item scenario:

To break it down, let’s look at an example of a profitable online sale.

You buy a used piece of furniture at a thrift store for $100. You bring it home and spend some money to fix it up. A few years later, you decide to redecorate and sell the restored piece of furniture online for $700. The payment platform takes $90 in seller fees, and the buyer pays for shipping.

To calculate your taxable gain, you would take your final sale price minus your cost basis (the original price you paid plus any fees related to the sale of the item):

$700 (sale price) – $190 (the original price + fees) = $510 (capital gain)

Since the buyer paid for shipping, you’d be left with a net profit of $510, and you’d report that income as a capital gain on your tax return.

As you can see from this example, certain expenses can be added to your cost basis to lower your gain. If you’re a hobby seller, you can lower your gain by subtracting seller fees paid to the online marketplace. However, the IRS does not let you deduct hobby expenses, like the cost of restoring the furniture or any costs related to shipping the item.

If you are selling as a business, you have more deductible expenses, which can reduce your taxable income. Any profits you make when selling as a business are considered business income and reported using Schedule C.

How to know when a sale isn’t taxable

If you sold an item at a net loss against its original cost basis, there is no gain to report — instead, you’d report it as a loss and will not be responsible for any income taxes on the sale.

Unprofitable item scenario:

You are having a “virtual garage sale” online and selling personal items you no longer use. One of the items you are selling is an old gaming console. You originally bought the console in new condition several years ago for $300, and you sold it online in 2023 for $50.

Since you sold the item for less than your original cost basis ($300), you do not need to pay any income taxes on the $50 you received from the sale. You’ll report the sale as a loss using Schedule 1 or Schedule D on your tax return, but it will amount to $0 in taxable gains.

Unique scenarios: Inherited items

Certain types of items come with their own special rules. One of the more common ones is how to price and calculate profits when selling inherited items.

How do I determine the cost basis of items I have inherited?

The cost basis of inherited assets is typically determined at the time of inheritance using fair market value (FMV). Fair market value is the current value of your item in an open market.

When calculating your cost basis using FMV, make sure you consider the item’s condition when it was inherited. If you cannot easily determine the fair market value of an item by looking at comparable sales of similar items, it might be best to get an expert appraisal.

Can I just use the value of a similar item sold online to determine the inherited item’s worth?

Yes, this is an acceptable way to determine the fair market value for most items. You can research what other people are paying for the same item in a similar condition and use that information to reasonably determine your item’s fair market value.

What proof do I need to keep for fair market value substantiation in this instance?

There is no “one size fits all” in keeping records. When you research the FMV of an item, you can record proof by getting an expert appraisal, taking a screenshot of what similar items are selling for online, creating a PDF, printing out the page — whatever method works best for you. Make sure to also record the date of the screenshots, printouts, or another form of proof for context. The method doesn’t matter as long as you have some proof in case the IRS asks for it.

Can I use the amount I sold the inherited item for to determine its FMV?

The IRS typically will not accept the item’s final sale price as proof of fair market value. As mentioned above, you should ideally have either an appraisal or recorded proof of similar items sold for the same price to substantiate how you determined the FMV at the time of inheritance.

Inherited item scenario:

Now let’s look at an example. Say you inherited an antique from a relative upon their death in 2020. You had the item appraised, showing that the item’s fair market value at the relative’s time of death was $3,000. You sell the item online in 2023 for $3,800 and pay $50 in shipping costs. You also pay the online marketplace $490.50 in seller fees.

Here’s how you would determine your taxable income on the inherited item:

$3,800 (sale price) – $3,000 (fair market value at time of inheritance) – $490.50 (seller fees) = $309.50 gain

You’d report $309.50 as taxable income when filing your 2023 tax return. Because you are not selling as a business, you would be unable to deduct the $50 you spent on shipping the item.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions 

The post Online Seller 1099-K FAQs and Scenarios Explained appeared first on TaxAct Blog.

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4 Common Misconceptions About Form 1099-K

Updated for tax year 2023.

If the new 1099-K reporting thresholds have you confused as an eBay seller, you’re not alone. But don’t worry — eBay and TaxAct® have partnered up to help you separate fact from fiction.

Below we’ll address some common misconceptions you might have heard about these changes and the truth about how your taxes could be affected.

Misconception 1: This is a new tax that I will have to pay on my profits.

The truth: This change is not a new tax imposed on online sellers but a new reporting requirement for eBay and other online marketplaces. Any income derived from a sale has always been reportable income for eBay sellers.

Previously, and continuing for 2023, you will only receive Form 1099-K from eBay if you hit $20,000 in gross payments and 200 transactions annually (the only exceptions would be if your state has a lower threshold or you were subject to backup withholding). The IRS has lowered this threshold for tax year 2024, meaning eBay and other marketplaces must report gross sales that equal or exceed $5,000 on a Form 1099-K beginning in tax year 2024.  This is part of a phase-in process by the IRS to eventually implement a $600 threshold in 2025.

Due to these changes, many sellers who have not received a Form 1099-K before will begin receiving the form in the coming tax years. eBay and TaxAct have partnered to help you understand the changes and how to report them on your income tax returns.

Misconception 2: All the transactions on my 1099-K are taxable.

The truth: Receiving a Form 1099-K doesn’t automatically mean you’ll owe income tax on the gross sales amount reported to you. You are taxed on your net income, but a 1099-K only shows your gross receipts. The amounts reported on Form 1099-K do not consider your cost basis and any adjustments for fees, refunds, credits, etc.

If you sold an item at a net loss against its original cost basis, you should report it as a loss on Schedule 1 or Schedule D. You will not be responsible for any income taxes on the sale.

When filing your tax return, use your Form 1099-K as an informational document to help you fill out Schedule C to report business profit and losses (if you are a sole proprietor) or Schedule D to report capital gains and losses (if you are a casual seller). Then make any necessary adjustments to make your tax return consistent with your own records. That’s why good bookkeeping is key.

Misconception 3: I’m only a casual seller, not a business, so I don’t need to report my sales profits as income.

The truth: Taxable income includes any income made from sales, whether you’re a casual seller, hobby seller, or a business.

For example, let’s say your hobby is thrifting old pieces of furniture, and sometimes you flip them for a profit. Last year, you bought a used piece of furniture for $100, restored it, and sold it on eBay for $700. This gives you a $600 profit. Unlike a business, as a hobby seller, you cannot deduct expenses incurred before the sale, such as the cost of restoring the furniture, but expenses on the actual sale (like any eBay fees) can be added to your cost basis to reduce your gain.

If casual selling becomes a regular profitable occurrence, the IRS may start to consider your hobby to be a formal business. Turning your hobby into a business could make you eligible for certain business tax deductions.

You can check the IRS’s guidelines for determining when a hobby becomes a business here. If you have questions about the differences between hobby selling and business selling, TaxAct Xpert Assist℠ 1 is an add-on feature that allows you to connect with a tax expert and get your questions answered in real time.

Misconception 4: I will be paying tax on all items I sell, even if it’s at a loss.

The truth: Income is determined by deducting expenses from the final sale price and determining if the transaction yielded a profit or a loss. Only the profit is considered taxable income, so you won’t owe any taxes on something you sell at a loss or for less than what you paid. We may sound like a broken record here, but for this reason, be sure to practice good bookkeeping for your taxable and nontaxable sales as an online seller.

We’ll look at a nontaxable transaction this time. Imagine you bought a new bike for $1,000 last year and then sold it on eBay for $700 this year. Because you sold the bike at a loss, there would be no income to be recognized on this sale even though the transaction may be reported on the 1099-K you received from eBay. Instead of reporting the sale as income, you would report it as a loss using either Schedule 1 or Schedule D.

For more information about how to report capital asset gains and losses on your tax return, check out our comprehensive guide to capital gains taxes.

The bottom line

While the 1099-K changes this year may be confusing for casual sellers and small businesses who have never seen this form before, TaxAct and eBay are doing our best to keep you and other sellers informed and prepared for next tax season.

In the meantime, eBay is advocating for their online sellers by fighting this legislation on your behalf. You can learn more about eBay’s efforts by checking out eBay Main Street.

eBay and its affiliates do not provide legal, tax, or accounting advice. This material is being provided for informational purposes only and is not intended as, and should not be relied upon for, legal, tax, accounting, or other professional advice. Please consult your own legal, tax, and accounting advisors for advice specific to your situation

1TaxAct Xpert Assist is available as an added service to certain users of TaxAct’s online, consumer prepared 1040 product. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. View full TaxAct Xpert Assist Terms and Conditions.

All TaxAct offers, products and services are subject to applicable terms and conditions.

IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.

The post 4 Common Misconceptions About Form 1099-K appeared first on TaxAct Blog.

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eBay Seller FAQs and Unique Scenarios Explained

Updated for tax year 2023.

You’ve likely heard about the new IRS reporting thresholds for Form 1099-K that were supposed to go into effect during the 2023 tax year. As of November 2023, the IRS has postponed the threshold changes once again, and you will only receive Form 1099-K for 2023 if you hit an annual threshold of $20,000 in gross payments and at least 200 transactions.

In 2024, the $20,000 threshold will be lowered to $5,000 with no transaction minimum. This is part of a phase-in process by the IRS to eventually implement a $600 reporting threshold in 2025 unless the IRS makes more changes.

We know these changes and postponements can be confusing, especially when it comes to selling items online. To help you understand, let’s look at some common concerns we see from online sellers and how to handle certain unique situations, like selling inherited items.

How to calculate your taxable income from an online sale

You only owe income tax on the net profits you make from a sale. To determine your profits, you need to keep track of each item’s sale price and any other expenses related to the sale.

If you are a casual seller (not a business) and you sell a personal item for more than you originally paid, the profit you make is considered a capital gain. Capital gains are taxable income and must be reported on your tax return using Schedule D.

To determine your taxable gains when selling personal assets, you will need this formula:

Sale Price (what you sold the item for) – Cost Basis (what you paid for the product + any fees associated with the sale of the item) = Capital Gain (income reported on Schedule D)

Capital gains are taxed at different rates depending on how long you hold the item before selling it. If you held the item for a year or less, it’s a short-term capital gain taxed as ordinary income. If you held the item for longer than one year, it’s considered a long-term capital gain. Long-term gains are taxed at capital gains tax rates, which are usually more favorable than ordinary income tax rates.

If you’re someone who learns best from examples, we will go over some capital gains calculation scenarios farther down. First, let’s learn how to calculate your cost basis and what kind of documentation you need to keep just in case the IRS has questions for you.

How to determine your cost basis

To determine your item’s cost basis, you’ll need to know what you originally paid for the item and have some kind of proof to show the IRS in case they ask for it. Typically, your proof would be a receipt or other documented proof of what you paid for the item.

How do I determine my cost basis without a receipt?

If you acquired an item long ago and no longer have the receipt, there are other ways to prove your cost basis. Look for invoices, statements, written communications, purchase history in retail apps, even before-and-after photos of the item that can show any differences or improvements made since acquiring it. For instance, if you bought the item new and later sold it in used condition, photos of the item in its original condition can help you determine your cost basis in relation to its purchase price (and vice versa).

When substantiating your cost basis for an item, anything is better than nothing. There is not one specific method you must use when keeping records, but try your best to find some kind of substantial proof just in case the IRS decides to question you.

What if I can’t find documents showing what I originally paid for the item?

If you can’t provide proof of your cost basis, the IRS could argue that your basis is $0 and require you to report the item’s entire sale price as a gain.

If you estimate your cost basis to calculate any potential gains but have no proof to back up your estimate, the IRS could choose to deny your calculation and require you to pay taxes on a larger gain. Just know that guesstimates should be your last resort, and you should strive to find something substantial to back up your cost basis claims if you can.

Profitable item scenario:

To break it down, let’s look at an example of a profitable online sale.

You buy a used piece of furniture at a thrift store for $100. You bring it home and spend some money to fix it up. A few years later, you decide to redecorate and sell the restored piece of furniture on eBay for $700. eBay takes $90 in seller fees, and the buyer pays for shipping.

To calculate your taxable gain, you would take your final sale price minus your cost basis (the original price you paid plus any fees related to the sale of the item):

$700 (sale price) – $190 (the original price + eBay fees) = $510 (capital gain)

Since the buyer paid for shipping, you’d be left with a net profit of $510, and you’d report that income as a capital gain on your tax return.

As you can see from this example, certain expenses can be added to your cost basis to lower your gain. If you’re a hobby seller, you can lower your gain by subtracting seller fees paid to eBay. However, the IRS does not let you deduct hobby expenses, like the cost of restoring the furniture or any costs related to shipping the item.

If you are selling as a business, you have more deductible expenses, which can reduce your taxable income. Any profits you make when selling as a business are considered business income and reported using Schedule C.

How to know when a sale isn’t taxable

If you sold an item at a net loss against its original cost basis, there is no gain to report — instead, you’d report it as a loss and will not be responsible for any income taxes on the sale.

Unprofitable item scenario:

You are having a “virtual garage sale” on eBay and selling personal items you no longer use. One of the items you are selling is an old gaming console. You originally bought the console in new condition several years ago for $300, and you sold it on eBay in 2023 for $50.

Since you sold the item for less than your original cost basis ($300), you do not need to pay any income taxes on the $50 you received from the sale. You’ll report the sale as a loss using Schedule 1 or Schedule D on your tax return, but it will amount to $0 in taxable gains.

Unique scenarios: Inherited items

Certain types of items come with their own special rules. One of the more common ones is how to price and calculate profits when selling inherited items.

How do I determine the cost basis of items I have inherited?

The cost basis of inherited assets is typically determined at the time of inheritance using fair market value (FMV). Fair market value is the current value of your item in an open market.

When calculating your cost basis using FMV, make sure you consider the item’s condition when it was inherited. If you cannot easily determine the fair market value of an item by looking at comparable sales of similar items, it might be best to get an expert appraisal.

Can I just use the value of a similar item sold on eBay or another site to determine the inherited item’s worth?

Yes, this is an acceptable way to determine the fair market value for most items. You can research what other people are paying for the same item in a similar condition and use that information to reasonably determine your item’s fair market value.

What proof do I need to keep for fair market value substantiation in this instance?

There is no “one size fits all” in keeping records. When you research the FMV of an item, you can record proof by getting an expert appraisal, taking a screenshot of what similar items are selling for online, creating a PDF, printing out the page — whatever method works best for you. Make sure to also record the date of the screenshots, printouts, or another form of proof for context. The method doesn’t matter as long as you have some proof in case the IRS asks for it.

Can I use the amount I sold the inherited item for to determine its FMV?

The IRS typically will not accept the item’s final sale price as proof of fair market value. As mentioned above, you should ideally have either an appraisal or recorded proof of similar items sold for the same price to substantiate how you determined the FMV at the time of inheritance.

Inherited item scenario:

Now let’s look at an example. Say you inherited an antique from a relative upon their death in 2020. You had the item appraised, showing that the item’s fair market value at the relative’s time of death was $3,000. You sell the item on eBay in 2023 for $3,800 and pay $50 in shipping costs. You also pay eBay $490.50 in seller fees.

Here’s how you would determine your taxable income on the inherited item:

$3,800 (sale price) – $3,000 (fair market value at time of inheritance) – $490.50 (seller fees) = $309.50 gain

You’d report $309.50 as taxable income when filing your 2023 tax return. Because you are not selling as a business, you would be unable to deduct the $50 you spent on shipping the item.

eBay and its affiliates do not provide legal, tax, or accounting advice. This material is being provided for informational purposes only and is not intended as, and should not be relied upon for, legal, tax, accounting, or other professional advice. Please consult your own legal, tax, and accounting advisors for advice specific to your situation.

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4 Common Misconceptions About Form 1099-K for 2023

Updated for tax year 2023.

If the new 1099-K reporting thresholds have you confused as an online seller, you’re not alone. But don’t worry — we’re here to help you separate fact from fiction.

Below we’ll address some common misconceptions you might have heard about these changes and the truth about how your taxes could be affected.

Misconception 1: This is a new tax that I will have to pay on my profits.

The truth: This change is not a new tax imposed on online sellers but a new reporting requirement for third-party payment platforms and online marketplaces. Any income derived from a sale has always been reportable income for online sellers.

Previously, and continuing for 2023, you will only receive Form 1099-K from the third-party platform if you hit $20,000 in gross payments and 200 transactions annually (the only exceptions would be if your state has a lower threshold or you were subject to backup withholding). The IRS has lowered this threshold for tax year 2024, meaning online marketplaces must report gross sales that equal or exceed $5,000 on a Form 1099-K beginning in tax year 2024. This is part of a phase-in process by the IRS to eventually implement a $600 threshold in 2025.

Due to these changes, many sellers who have not received a Form 1099-K before will begin receiving the form in the coming tax years.

Misconception 2: All the transactions on my 1099-K are taxable.

The truth: Receiving a Form 1099-K doesn’t automatically mean you’ll owe income tax on the gross sales amount reported to you. You are taxed on your net income, but a 1099-K only shows your gross receipts. The amounts reported on Form 1099-K do not consider your cost basis and any adjustments for fees, refunds, credits, etc.

If you sold an item at a net loss against its original cost basis, you should report it as a loss on Schedule 1 or Schedule D. You will not be responsible for any income taxes on the sale.

When filing your tax return, use your Form 1099-K as an informational document to help you fill out Schedule C to report business profit and losses (if you are a sole proprietor) or Schedule D to report capital gains and losses (if you are a casual seller). Then make any necessary adjustments to make your tax return consistent with your own records. That’s why good bookkeeping is key.

Misconception 3: I’m only a casual seller, not a business, so I don’t need to report my sales profits as income.

The truth: Taxable income includes any income made from sales, whether you’re a casual seller, hobby seller, or a business.

For example, let’s say your hobby is thrifting old pieces of furniture, and sometimes you flip them for a profit. Last year, you bought a used piece of furniture for $100, restored it, and sold it online for $700. This gives you a $600 profit. Unlike a business, as a hobby seller, you cannot deduct expenses incurred before the sale, such as the cost of restoring the furniture, but expenses on the actual sale (like any fees you paid to the online marketplace) can be added to your cost basis to reduce your gain.

If casual selling becomes a regular profitable occurrence, the IRS may start to consider your hobby to be a formal business. Turning your hobby into a business could make you eligible for certain business tax deductions.

You can check the IRS’s guidelines for determining when a hobby becomes a business here. If you have questions about the differences between hobby selling and business selling, TaxAct Xpert Assist℠ 1 is an add-on feature that allows you to connect with a tax expert and get your questions answered in real time.

Misconception 4: I will be paying tax on all items I sell, even if it’s at a loss.

The truth: Income is determined by deducting expenses from the final sale price and determining if the transaction yielded a profit or a loss. Only the profit is considered taxable income, so you won’t owe any taxes on something you sell at a loss or for less than what you paid. We may sound like a broken record here, but for this reason, be sure to practice good bookkeeping for your taxable and nontaxable sales as an online seller.

We’ll look at a nontaxable transaction this time. Imagine you bought a new bike for $1,000 last year and then sold it online for $700 this year. Because you sold the bike at a loss, there would be no income to be recognized on this sale even though the transaction may be reported on the 1099-K you received from the payment platform. Instead of reporting the sale as income, you would report it as a loss using either Schedule 1 or Schedule D.

For more information about how to report capital asset gains and losses on your tax return, check out our comprehensive guide to capital gains taxes.

The bottom line

While the 1099-K changes this year may be confusing for casual sellers and small businesses who have never seen this form before,we want to keep you and other sellers informed and prepared for next tax season.

1TaxAct Xpert Assist is available as an added service to certain users of TaxAct’s online, consumer prepared 1040 product. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. View full TaxAct Xpert Assist Terms and Conditions.

All TaxAct offers, products and services are subject to applicable terms and conditions.

IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.

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