Why the Prospect of a 1099-K at the End of the Year Is Keeping People From Turning Stuff Into Cash on eBay - eSeller365

Summary

Inflation is hitting American and global consumers globally as gas prices continue to rise and trips to the grocery store usually result in more than one instance of sticker shock.

The news is grim on this front. Just three headlines from this week underscore the problem that consumers face around the world.

Inflation is hitting American and global consumers globally as gas prices continue to rise and trips to the grocery store usually result in more than one instance of sticker shock.

The news is grim on this front. Just three headlines from this week underscore the problem that consumers face around the world.

I will leave the detailed cause and explanations of why consumers everywhere are getting hit hard with higher prices to other pundits.

But as consumers are facing rising costs in essentials from food to gas, they are increasingly looking at ways to make some extra money.

Start a side hustle, a second job, have a garage sale, sell on online marketplaces like eBay or Etsy, are all good options that may help ease the burden of the current financial situation.

Online selling on a marketplace like eBay is especially appealing as recommerce, the sale of previously owned items, is growing with consumers looking for good deals while reducing the environmental impact by reusing products and keeping them out of landfills.

eBay’s latest Recommerce Report shows some interesting data supporting today’s interest by shoppers to buy pre-owned products over new ones.

73% prefer to buy pre-owned because it’s less expensive than buying new.

34% cited sustainability as a factor for buying pre-owned items.

And while tech items, often sold as refurbished items, are generally thought to be a leading category for pre-owned goods, apparel is now matching tech (42%).

Since sustainability is one of the top reasons mentioned in the report why consumers are more open now to purchasing pre-owned items, younger people lead the way here due to their heightened interest in sustainable living.

So, it’s not surprising that Gen Z is the leading demographic with the report showing that 80% have purchased a pre-owned item over the last 12 months.

But what may come as surprise is that among respondents in the Boomers demographic, 70% have made at least one recent pre-owned purchase as well.

Millennials, Gen X, fall between the Gen Z and Boomers, with Post-War generation consumers coming in at 62% which is the lowest among all demographics but still a very strong number.

Obviously, as easy as online marketplaces and retailers have made using their platforms, there still is friction among older adults in fully adopting eCommerce.

However, Covid-19 has changed much of that as local restrictions and lockdowns forced more people to shop online for necessities.

The bottom line is that eBay’s Recommerce Report underscores the circular economy is growing – and while it may have been championed over the past years by environmental interests – today’s economic pressures are making more consumers aware of the price advantages pre-owned products offer.

The Selling Opportunity

As terms like Circular Economy and Recommerce are today’s buzzwords that are increasingly making it into corporate communications such as press releases and earnings reports, the opportunity of selling pre-owned items online on a marketplace like eBay is nothing new.

Actually, it’s how eBay started with the first sale being a broken laser pointer.

While eBay has been used for years now by occasional sellers to sell items out of their garage or closets, the marketplace has also helped grow sellers into businesses selling pre-owned products as a full-time job.

These sellers would scour estate and storage auctions, flea markets, garage sales, and thrift stores looking for items they could sell for a profit on eBay.

Despite changes in eCommerce requiring fast and free shipping, easier returns, better descriptions and images, as well as eBay’s strategic shift to favor new products as it tried to compete with Amazon’s rapid growth in the 2000s, many small business sellers make a good living on eBay with pre-owned products.

With inflation hitting consumer pocketbooks, many more people are looking to the idea of selling stuff out of their garages and closets today to boost their finances.

And while eBay isn’t the only online platform today to sell used items, it’s still the biggest and best-known platform, which means, people looking to turn their stuff into cash are still more likely to head to eBay versus other options.

In 2020, with only about a half a year on the job, eBay CEO Jamie Iannone said at an investor conference that rebuilding the C2C business (Consumer to Consumer) is a vital part of his strategy refocusing eBay toward pre-owned (or pre-loved as they call them now) items.

In many ways, he is right that eBay tried too much to compete with Amazon without ever committing the financial resources to build the logistics network to be an actual competitor. We see this today with the way Walmart is trying to claw back lost ground, it’s not easy and cheap.

Focusing on pre-owned, Iannone suggested that the average person has about $4,000 worth of stuff in their homes that could be listed on the marketplace. Considering today’s economic situation, $4,000 could go a long way to help ease the financial stress many feel.

But if you are in the United States, there is a catch!

The 1099-K Problem

As part of The American Rescue Plan Act of 2021, the threshold for Third-Party Settlement Organizations (TPSOs) to issue an IRS form 1099-K showing how much money was transacted through their payments network was lowered to $600 per year.

While the 1099-K reporting requirement existed for years, the previous threshold was $20,000 and 200 transactions per year, which many occasional sellers would never reach.

Some states had already lowered their thresholds to trigger a 1099-K, but most Americans would not receive the form unless they hit the federal threshold of $20K and 200 transactions for the year.

When this news came out last year, some lower volume or occasional sellers panicked as they erroneously believed that they would receive a 1099-K for sales in 2021, but the new requirement was not going to start until this year.

Since TPSOs are not only marketplaces like eBay or Etsy that process payments on their platform, but also financial service companies like PayPal/Venmo or Block (Cash App), the media seemed to mostly focus on those P2P payment services initially.

Later eBay, Etsy, and others also were added into the news cycle which did make more people aware that this new regulation would apply to occasional sellers as well and online marketplaces issued bulletins and seller updates trying to explain the new regulations for 2022.

Business and Personal Payments

Unfortunately, one of the biggest issues with this new requirement is the distinction between business and personal transactions.

A business transaction is pretty simple. If a seller buys an item for $10, they sell it for $50, they have a $40 profit. They can reduce the income tax burden of the $40 profit by claiming reasonable business expenses, such as postage, mailing supplies, selling fees, and other typical business costs.

Personal transactions are more complicated.

For the likes of PayPal, Venmo, or Cash App, personal transactions typically include reimbursements for expenses, splitting a restaurant check, or receiving a tax-exempted gift.

Since these types of personal transactions are typically not taxable, PayPal and Venmo sent out information to users on how they will make this distinction to comply with the 1099-K regulations.

It appears one of the criteria they will use to determine if a transaction is considered personal or business is the way it was processed on their platform.

If a user sends money to another user and that transfer doesn’t incur a transaction fee, it will apparently be treated as a personal transaction. But if the transaction is processed as a “sale,” which usually means a payment transaction fee is collected, then it’s a possible business transaction and will be included in the 1099-K.

I want to be careful here to clarify that this may not be the only criteria on how these companies may make that distinction. They may also use the type of account (business or personal account) or other information they may have to categorize payments as one type or another.

You should check with your favorite P2P app on how they will handle P2P reporting if you are unsure.

When it comes to online marketplace platforms such as eBay the problem of identifying personal and business transactions becomes effectively impossible.

There is no viable way for an online marketplace to know if a sale is from stuff out of a closet or if the seller purchased the item at a thrift store and now is selling it for profit on its platform. Both would be pre-owned.

Therefore, online marketplaces, have to treat each transaction as if it’s a possible business sale.

Some folks erroneously believe that because eBay has taken over processing payments (became a TPSO), it’s the sole reason they now will receive the 1099-K from the marketplace.

But that is just incorrect. Even if eBay transactions would still be handled through PayPal, PayPal would know if a transaction happened on eBay, and therefore, would most certainly classify it as a transaction that has to be reported on a 1099-K.

The blame some folks have put on eBay regarding this issue is just misguided. All TPSOs have to issue a 1099-K form when probable business transactions on their platform exceed $600 in total.

But this requirement is creating a new headache for occasional sellers that were only seeking to turn old stuff into cash, with the vast majority of such sales being at a loss.

Before diving into the new threshold quagmire, it’s important to note that sellers that sold an item and made a profit, regardless if this was from running a business or if they happen to profit from a collectible they found in a drawer, would have been required to report the profit as income (minus allowable expenses) prior to this year as well.

Then Why is The New 1099-K $600 Threshold a Problem Now?

While the new regulation was trying to shore up people running “shadow businesses” that never paid any income tax on profits, it has created a headwind for those sellers that only want to make some extra money from personal items they own.

If someone sells a few thousand dollars of personal items that were clearly sold below the original price ($200 for a 3 year old smartphone or $25 for name brand dress bought at Macy’s last year, etc.) there is no direction from the IRS on how these “cost” are to be substantiated.

So, when the 1099-K shows up in January, a person can either add it as income and pay taxes on the full amount or file a Schedule C to reduce the tax burden to profits only.

But the Schedule C is officially known as “(Form 1040), Profit or Loss from Business (Sole Proprietorship)” which means the taxpayer is saying they are operating a business.

Going by standard business practices, the cost of goods is typically fully deductible, meaning that a smartphone sold for $200 that was purchased for $800 was technically sold at a $600 loss.

Ah, wait, the IRS has something to say about that, “Losses from the sale of personal-use property, such as your home or car, aren’t tax deductible.”

That IRS advice (Topic No. 409 Capital Gains and Losses) gets into complicated assessment rules of property value that are normal for Capital Gains/Losses use cases, but not really the online sales of a smartphone or dress from Macy’s.

Intuit, the makers of TurboTax, addresses eBay sales for 2021 this way:

“If you use the site to get rid of household articles you’ve used in the past, you may qualify for “occasional garage or yard sale” treatment. According to the IRS, if your online auction sales are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report income from those sales.“

Unfortunately, Intuit links to an IRS page “Tax Tips for Direct Sellers” to substantiate their advice, but that page is marked as ‘Historical Content’ and doesn’t seem to discuss the “occasional garage or yard sale” as mentioned by Intuit.

Other sources provided by online tax filing services that discuss the 1099-K and online marketplace sales make similar comments that proceeds from personal items below the original cost are not taxable but none explain how to deal with that situation in 2022.

To be fair, up to 2021, the chance of someone selling personal goods exceeding $20,000 or 200 sales for the year was probably pretty slim.

And if they did, they likely were selling items that probably would have been either covered under the Captial Gains or Inheritance regulations and have had professional tax filing help.

That is why the new $600 reporting threshold is so problematic as there is little forward-looking guidance and yet it may require so many more people to deal with this situation next year during tax time.

Sure, the new rule will expose the tax cheats that have been running businesses on eBay and other marketplaces but stayed below the previous 1099-K reporting requirement, potentially avoiding paying thousands of dollars in taxes per year, but it’s creating a new headwind (or headache) for those people that are just trying to make a few extra dollars with stuff they bought years ago.

I believe the questions regarding this regulation are keeping people from selling on eBay and other marketplaces because they don’t know how this may impact them next April.

Many may have no choice but spend hundreds of dollars on a tax professional to file their 2022 taxes trying to avoid or minimize paying income tax on those sales that are typically thought to be tax-exempt.

Furthermore, the information from marketplaces is clear that the 1099-K has to include shipping and taxes, which if these sellers chose to just report all of the reported amount as income, they would be paying taxes on revenues that are deductible expenses in just about any business situation.

I have seen some sellers on online forums say they will try to stay under the $600 max reporting requirement, but that probably means they have to stay around the $500 mark to ensure shipping and taxes are not going to trigger the threshold.

All of this seems very unfair to these sellers that are just trying to make some ends meet.

The Coalition for 1099-K Fairness

This lack of clarity and increased burden in tax compliance for small and occasional sellers is fully understood by eBay and other marketplaces.

In April, eBay, Etsy, OfferUp, Poshmark, Mercari, Reverb, and Tradesy formed a coalition “promoting an accessible and fair online sales market for entrepreneurs, microbusinesses, and casual sellers selling used and pre-owned goods via online platforms.”

The CEOs of these companies are trying to push Congress to act on introduced legislation (S.3840/H.R.7079, S.3546/H.R.6913, S.948/H.R.3425) that could bring relief to this situation ranging from upping the requirement to $5,000 to a complete repeal of the new threshold.

These bills would not change the situation for state regulations but still would apply to most American sellers. Unfortunately, the longer there is ambiguity on this issue, the longer some people will stay on the sidelines.

In this post, I did not get into all of the 1099-K details, but I suggest my other post on this subject here that gets into more details on what the 1099-K means.

I used eBay here as the primary example because of its dominant position in the market for those wanting to sell pre-owned products.

But potential sellers looking to sell on Etsy, OfferUp, Poshmark, Mercari, Reverb, and Tradesy, including marketplaces not part of The Coalition for 1099-K Fairness like Amazon or Bonanza, face the same hurdles.

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Why the Prospect of a 1099-K at the End of the Year Is Keeping People From Turning Stuff Into Cash on eBay - eSeller365
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