Bad Paypal 1099

BRab

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So I just got a 1099 from Paypal for selling through Goods and Services. I was under the impression that would only happen to those who sell large amounts, like over $20K. I only sold about $800 worth of items. I'm kinda pissed, especially since it was mostly stuff I had bought previously (and paid sales tax) and was selling at a loss.

Has this happened to anyone else? Is it possibly a mistake that I got served a 1099?
 

madcap_magician

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The issues here are threefold:

1. The federal threshold for requiring payment processors to issue 1099s is $20,000 and 200 transactions. However, a not-insignificant number of states in the last five years have changed their own laws to require much lower thresholds.
2. Many of these laws were retroactive to the entire year when they were enacted, so a lot of people are getting 1099s who would not have gotten them before and were not expecting them.
3. If you determine profit and loss on this reportable income, the odds are none of your 'income' is taxable, as most of us will for most sales incur Paypal fees and shipping costs and in most situations sell at a loss as well. The problem is that because many people were not expecting a 1099, it's likely that few people have records of when they purchased all the knives they've bought and sold and what the actual and ancillary costs were for buying and selling.

There is a minor issue as well in that some of the Instagram and Facebook sales crowds legitimately do $50-80k and hundreds of transactions a year, and many of them skate by using F&F to do it and aren't accustomed to having to treat their side business like an actual side business - they're too used to tax and fee evasion.
 

Wild Willie

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I'm pretty sure the cutoff for a 1099 is 600 dollars everywhere... At least that's what I've dealt with being in business for myself.
 

madcap_magician

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photoman12001

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Same issue here, also in Virginia. I was well under the 20K/200 transactions and had to dig for a while before I found out it was because of Virginia. I'm definitely losing money at this so it's just a ridiculous PITA. I'm active duty military and my home of record is Colorado so I don't know how that will factor in. I had my taxes filed over a week ago because I thought I had everything. Know I have to wait for the IRS to accept it (apparently starting 12FEB) before I can even look at this for amendment and see what I have to do. In the meantime I'm avoiding PayPal and taking payments via Zelle, money order, or ???.
 

Triton

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Same issue here, also in Virginia. I was well under the 20K/200 transactions and had to dig for a while before I found out it was because of Virginia. I'm definitely losing money at this so it's just a ridiculous PITA. I'm active duty military and my home of record is Colorado so I don't know how that will factor in. I had my taxes filed over a week ago because I thought I had everything. Know I have to wait for the IRS to accept it (apparently starting 12FEB) before I can even look at this for amendment and see what I have to do. In the meantime I'm avoiding PayPal and taking payments via Zelle, money order, or ???.

I have heard very bad things about zelles security and fraud protection.
 

Heirphoto

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So if you state goes to the $600 cap and Paypal issues as 1099 it will also go to the federal IRS not just your state I assume. So even though they were not required to send a federal 1099 at $600+ once sent (because of certain state regulations) are you now on the hook for that income on federal taxes as well or just for your state taxes?

Seems like a bad time for some states to do this. With the pandemic and so many loosing jobs I can see people selling off all sorts of items on eBay, etc.... just to generate income and to now be taxed on it, especially when unaware seems even worse. I am sure no one has records for stuff they bought years ago to generate any idea of profit or loss.

To even use the profit loss "loophole" would you not need to file business taxes or can something be done on general household taxes?
 

Heirphoto

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Revisiting this topic with new info.

Maryland has now joined the threshold of $600 Paypal goods & services payments regardless of the number of transactions and Paypal will be sending a 1099 for 2021 sales.

I also saw on another media outlet that Paypal (and eBay, etc....) will start doing the $600 threshold for all states starting with 2022 good & services sales. This change to $600 from $20K & 200+ transactions was part of the new stimulus bill.

Even if you kept buy and sell records the issue becomes correlating the actual profit (taxable income) you made vs. the 1099 reported to IRS (state, local and federal). Other than filing a Schedule C (profit and loss for business) I see no way to document losses otherwise. I am having my accountant look into any ways to legitimately do this as I really enjoy my catch and sometimes release hobby of buying knives and vintage cameras, many of which get moved on after short trial period, usually at break even or a loss.

This same issue will apply no matter what you sell....downsizing your houshold, thinning out old sports equipment, electronics, etc... all stuff you already spent taxed income on, now becomes taxable as if you are a business buying just to sell unless you can document and file profit and loss (like a business).
 
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photoman12001

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Revisiting this topic with new info.

Maryland has now joined the threshold of $600 Paypal goods & services payments regardless of the number of transactions and Paypal will be sending a 1099 for 2021 sales.

I also saw on another media outlet that Paypal (and eBay, etc....) will start doing the $600 threshold for all states starting with 2022 good & services sales. This change to $600 from $20K & 200+ transactions was part of the new stimulus bill.

Even if you kept buy and sell records the issue becomes correlating the actual profit (taxable income) you made vs. the 1099 reported to IRS (state, local and federal). Other than filing a Schedule C (profit and loss for business) I see no way to document losses otherwise. I am having my accountant look into any ways to legitimately do this as I really enjoy my catch and sometimes release hobby of buying knives and vintage cameras, many of which get moved on after short trial period, usually at break even or a loss.

This same issue will apply no matter what you sell....downsizing your houshold, thinning out old sports equipment, electronics, etc... all stuff you already spent taxed income on, now becomes taxable as if you are a business buying just to sell unless you can document and file profit and loss (like a business).

This is so lame. It has already changed the way I buy. If I’m not sure it’s a forever knife I don’t buy it. I’ve got a pile of stuff to sell but haven’t posted much of it yet. I wonder if this will be the same for all transaction vendors or just PayPal. I’ve used Zelle for a few transactions and that has worked well.
 

Heirphoto

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This is so lame. It has already changed the way I buy. If I’m not sure it’s a forever knife I don’t buy it. I’ve got a pile of stuff to sell but haven’t posted much of it yet. I wonder if this will be the same for all transaction vendors or just PayPal. I’ve used Zelle for a few transactions and that has worked well.

Do to the Stimulus Bill wording this is supposed to apply to all pass through payment processors so Venmo, eBay managed payments, etc... should all be affected for payments starting Jan. 1st 2022. Maryland, Virginia and I think Massachusets, Vermont and Illinois have all recently been added to the requiremenet for payments recieved after Jan. 1st 2021, this year.

I have always pretty much bought with the intention of items being keepers but once here, or when something more interesting shows up I tend to sell old 'toys" to buy new "toys". That is pretty much changing now and being retired my wife and I really want to downsize and clear out a lot of household and personal items that just would not do as well on a Craigslist cash only basis. eBay is our best bet to recover the funds invested in these lifelong accumulated items so maybe we will add eBay reselling to our other small business venture if my accountant feels it is the best way. Otherwise I will just eat the tax loss as downsizing is a must.
 

RayseM

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Revisiting this topic with new info.
I also saw on another media outlet that Paypal (and eBay, etc....) will start doing the $600 threshold for all states starting with 2022 good & services sales.

Do I understand you correctly that this will effect 2022 sales but not sales made in 2021? Either now or later, this will change a lot of exchange deals with a boost to money order or personal checks and private deals with F&F for PP. :(
 

Heirphoto

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Do I understand you correctly that this will effect 2022 sales but not sales made in 2021? Either now or later, this will change a lot of exchange deals with a boost to money order or personal checks and private deals with F&F for PP. :(

Depends on your state. Takes effect for every state in 2022. But now in 2021, it is at least MD, VA, and MA according to Paypal and on the web I see VT, IL also mentioned for 2021. RI and CT might have already been on the $600 threshold for several years.

Plus not being widely publicized image everyone's surprise when you get a 1099 with a few grand of sales over a year and you are not prepared to cover the extra tax burden. It could be just the $$ amount to knock you into the next tax bracket and really put a hurting on things.
 

on_the_edge

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Depends on your state. Takes effect for every state in 2022. But now in 2021, it is at least MD, VA, and MA according to Paypal and on the web I see VT, IL also mentioned for 2021. RI and CT might have already been on the $600 threshold for several years.

Plus not being widely publicized image everyone's surprise when you get a 1099 with a few grand of sales over a year and you are not prepared to cover the extra tax burden. It could be just the $$ amount to knock you into the next tax bracket and really put a hurting on things.
Getting knocked into the next tax bracket and the concern you express is not a legitimate worry. For example, if you are $1,000 into the next higher tax bracket, technically only that last $1,000 is taxed at the higher rate. Your marginal tax rate only applies to that amount that causes you to be there in the first place, if that makes sense.
 
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So if I buy a knife for $100 and pay 7% sales tax - $107

Then sell it for $100

End of year comes and I've got $600+ in transactions

So that $100 I sold it for ends up as $100 in income - subject to 10%-37% federal tax rate

So the knife's total tax cost ends up anywhere from 17%-42% depending

Selling on eBay with Paypal and it jumps another 14%

So selling a knife you bought with your taxed income, which you then paid sales tax, which you sold and then pay income tax and processing fees ends up costing between 32%-56% of the value of the knife

Just up in smoke to the IRS

That's crazy

This is going to hurt the industry a ton in 3-5 years

Can't sell more than a few knives you bought and didn't like or you get knocked hard on taxes

Taxes designed for business and not regular people engaging in short term, hobby level online sales

Well, maybe it'll kill the Spyderco flipper market so I can actually buy one for once
 
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If anybody from Missouri is reading this, Missouri has had the $600 cap for awhile.

I saw a post recently where someone was requesting payment by money order or silver.
 

braillediver

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This will take some thought on what to do in the future. I like the journey \ handling nice knives. So I could have a few thousand $ in transactions but resell most of my acquisitions and incur at least a 20% loss. And that's being optimistic.

To pay federal income tax on all the sales which are net negative would jack the loss up considerably.
 

jlauffer

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Been dealing with this since 2018 in MA, for the 2017 tax year. Stopped selling for a few years after getting blindsided by this, but had no choice in 2020 and will again exceed $600 in 2021. But as long as you keep records it's not too bad. For 2020 I got a 1099K for approx $4k, but with expenses, etc, my taxable "profit" was only about $200, and that was only because some of the items were purchased long ago before I started keeping records, so I don't know what I originally paid for them.
 

not2sharp

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We are not a business. Did not intend or behave as one and yet are now subject to the same tax rules. Without even a mechanism by which to file an appropriate return. Sounds like this will be challenged in the courts for a while. We will have to wait and see.

In the interim, no problem; just add the additional cost to the price of the goods sold and have confidence that the rest of the market will do the same. The price of real property of every kind is about to rocket and hyperinflation is here to stay. The price of everything used is about to go from the (current market rate + tax on profit) to (current market rate + tax on full sales value). New items will be priced even higher (they are new) and of course employees will demand equivalent salary increases....

I would say the important thing is don’t panic and try to hold your position until the fog and chaos clears.

n2s
 

Heirphoto

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Been dealing with this since 2018 in MA, for the 2017 tax year. Stopped selling for a few years after getting blindsided by this, but had no choice in 2020 and will again exceed $600 in 2021. But as long as you keep records it's not too bad. For 2020 I got a 1099K for approx $4k, but with expenses, etc, my taxable "profit" was only about $200, and that was only because some of the items were purchased long ago before I started keeping records, so I don't know what I originally paid for them.

How did you handle it on the tax forms to reduce the 1099 amount? Did you treat it like a business?
 
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