The IRS will strengthen control over personal income from online sales: what will change

Depending on your situation, you may be receiving income that the IRS wants to know about. And if you're a regular online seller, keep in mind that after this year it can become harder to avoid income reporting requirements. Writes about it CNBC.

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While the tax laws that apply to such transactions have not changed, they have become more visible, said Kari Weston, director of tax practice and ethics for the American Institute of CPAs.

Under current regulations, people who sell goods or services through platforms such as Uber, Ebay, Etsy, and others using third-party transaction networks (such as PayPal) usually only receive a tax form if they participate at least in 200 transactions totaling $ 20 or more. This form, called 000-K, is also filed with the IRS.

Starting next year, the federal threshold for issuing 1099-K will drop to $ 600 with no transaction floor in line with the recently passed American Rescue Plans Act (some states already have lower minimums).

This means that in early 2023, you can get 1099-K from the online sales you make in 2022. And it will happen whether you are a casual seller or acting like a business if you have sold more than $ 600 on one platform. This does not necessarily mean that you will owe cash tax, but you will need to state this on your tax return.

Ebay is among the platforms that will be affected by the new reporting rule, and the company is working with legislators to address any concerns that may cause.

“EBay believes in following the law and maintaining proper tax records,” a company spokesperson said. “However, sending confusing 1099-Ks to almost every random seller who uses an online platform to generate additional income is the wrong approach.”

In addition, a social security number is required to issue 1099-K, leading some of the affected companies to fear that this will lead to merchants abandoning the platform, said Garrett Watson, senior tax policy analyst. Not all platforms collect this information on a regular basis.

However, due to the current high threshold applied to 1099-Ks, even sellers who have a clear profit motive may not receive the form—meaning the IRS won't know about it either, which could lead to underreporting of income.

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At last count, the tax gap—the difference between what taxpayers owe and what they pay—was estimated at $381 billion a year, according to a 2019 IRS report that analyzed data from 2011, 2012 and 2013.

Regardless of whether or not you received your tax form, there are times when income you earn from online sales must be reported to the IRS.

Here's what you need to know about current tax regulations.

What is taxable

“If your sales are akin to a garage sale—that is, you sell things for less than you originally paid—there is usually no reason to report what you made,” the American Institute of CPAs said. Essentially, there is no “income” to report.

For example, among those who sold used items on Ebay, 85% took items from their home - items they already owned and no longer used, according to a recent Ebay report.

Otherwise, taxation depends on the situation.

If you sell for profit for reasons outside of your hobby, you will likely be considered a business owner for tax purposes. For example, if you regularly buy clothes at yard sales (or other discounted places) and sell them—online or not—with the intention of making a profit.

The good news is, as a business owner, you can deduct your expenses from the money you earn. And if those expenses exceed your business income in a particular year, you can deduct the resulting losses from other income that you report on your tax return.

The IRS expects to hear from anyone with a net income of $ 400 or more from self-employment. And although you will have to pay 15,3% self-employment tax, you can deduct half of that amount on your tax return.

The IRS also wants to know about the income you receive from your hobby. However, unlike business losses, taxpayers can generally only deduct applicable expenses up to the amount of hobby income. In other words, surplus (loss) cannot be deducted from other profit. But since it's a hobby and not a business, you don't need to pay self-employment tax on income.

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Determining whether you are selling something as a hobby or for business can sometimes be tricky. On the IRS website there are some tips to help taxpayers make a decision.

Meanwhile, sometimes an item is more expensive when sold, rather than when purchased or received as a gift. Your profit will usually be the difference between the cost basis—the value of the item when you came into your possession—and what you sell it for.

In these one-off cases, the profits will be treated as capital gains. This generally means that it is either taxed as ordinary income if you have owned the asset for less than a year, or it is considered long-term income with a tax rate of 0%, 15% or 20%, depending on your total income.

There are exceptions to these rates, including 28% that apply to proceeds from the sale of items such as fine art, collectibles, antiques, stamps, coins and some jewelry, experts say.

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