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

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

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The news is grim on this front. Just three headlines alone underscore the challenge consumers face around the world.

• USA Today: Inflation hit new 40-year high in May as gas, grocery, rent prices jumped
• Global News: High gas prices driving change in Canadian tourism: ‘Cost of doing business’
• CNBC: Euro zone inflation hits yet another record high as food and energy prices soar

I will leave the cause and explanation of why consumers everywhere are getting hammered with higher prices to others.

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

Starting a side hustle, getting a second job, holding a garage sale, and selling 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.

The latest eBay Recommerce Report offers interesting insights into how shoppers are changing their preference for buying used products over new ones.

• 73% prefer buying pre-owned items because they are less expensive than new products.
• 34% cited sustainability as a factor for buying pre-owned items.
• And while tech items, often sold as refurbished items, are generally believed 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 surprising 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 Gen Z and Boomers, with Post-War generation consumers coming in at 62%, the lowest among all demographics but still a significant number.

As easy as online marketplaces and retailers have made using their platforms, older adults still encounter friction in fully adopting eCommerce as they are unsure about some steps in completing the sale.

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 growth of the circular economy.

While it may have been championed over the past years by environmental interests, current economic pressures have made more consumers aware of the price advantages pre-owned products offer.

The Selling Opportunity

As terms like Circular Economy and Recommerce are the buzzwords of the day, 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.

eBay’s original concept was to be something of an online flea market, and it got the ball rolling as the first item sold on the platform was 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 explore estate and storage auctions, flea markets, garage sales, and thrift stores searching for items they could sell for a profit on eBay.

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

Inflation is hitting consumer pocketbooks hard, so more people are considering selling stuff out of their closets or garages to help ends meet.

And while eBay may not be the only online platform today to sell used items, it’s still the most popular and best-known platform. This means people looking to turn their old stuff into cash are more likely to head to eBay versus other platforms.

In 2020, with only about 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 hard to compete with Amazon without ever committing the financial resources to build the logistics network to be a realistic 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 four thousand dollars worth of stuff in their homes to sell on the marketplace.

In light of the current economic situation, this found money could go a long way to help ease the financial stress many people feel.

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

The 1099-K Dilemma

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 flowed through their payments network was lowered to $600 per year.

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

A few states had adjusted their thresholds to trigger a 1099-K on lower volume, but most Americans would not receive the form unless they hit the federal threshold of $20K and 200 transactions for the year.

When the news came out last year that the IRS had to lower the threshold for issuing 1099-K forms, lower volume and occasional sellers panicked as they erroneously believed they would receive a 1099-K for sales in 2021, resulting in an immediate tax nightmare.

But the new requirement was applicable for the tax year 2022, so sellers had some time to prepare for this eventuality.

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

Later eBay, Etsy, and others were added into the news cycle, which made more people aware that this new regulation would also apply to small or occasional sellers on online marketplaces.

Many marketplaces issued bulletins and seller updates attempting to explain the new regulations for 2022.

Without a doubt, this regulatory change had a chilling effect on some sellers who decided to leave instead of dealing with a potential tax burden.

Business and Personal Payments

Unfortunately, one of the main issues with this new requirement is the distinction between business and personal transactions and how those impact the taxation of proceeds.

A business transaction is pretty simple. If a seller buys an item for $10, they sell it for $50, they have a $40 profit.

The seller 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 P2P payment apps like 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 generally not taxable, PayPal and Venmo sent out information to users on how they will make this distinction to comply with the 1099-K regulations.

The way a transaction is processed on their platform appears to be one of the primary criteria they’ll use to determine whether a payment is a personal or business transaction.

If a user sends money to another user and that transfer doesn’t incur a transaction fee, it apparently will 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 will be considered a possible business transaction and will be included on the year-end 1099-K form.

I want to be careful here to clarify that this may not be the only criteria on how these companies may make this distinction.

They may also use the type of account (business or personal) or other information they may have to categorize payments as one type or another.

Users should check with their favorite P2P app on how they will handle 1099-K reporting.

When it comes to online marketplace platforms such as eBay, the problem of identifying personal and business transactions becomes far more complicated.

Marketplaces cannot tell whether a sale comes from stuff out of a closet or if a seller bought it at a thrift store and is now selling it for profit.

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

Some folks erroneously believe that because eBay has taken over processing payments (became a TPSO), this is the reason they now will receive the 1099-K form.

But that is just incorrect.

Even if PayPal still handled eBay transactions, PayPal would know that the transaction occurred on eBay. Therefore, it would categorize it as a potential business transaction to report it on a 1099-K form.

The blame some people have put on eBay regarding this issue is misguided. All TPSOs must issue a 1099-K form when potential business transactions on their platform exceed $600.

It’s understandable how this new requirement is causing headaches for occasional sellers who are only trying to turn old stuff into cash, almost all of which will be 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) before this year as well.

The new 1099-K threshold isn’t a new tax, the purpose of the rule change is to identify income that should be taxed.

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 applicable income tax on profits, it has created a challenge for those sellers that only want to make extra money from personal items they own.

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

When the 1099-K shows up in January, a person can either add it as income and pay taxes on the entire 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 originally bought for $800 resulted in a $600 loss.

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

This IRS advice (Topic No. 409 Capital Gains and Losses) gets into complicated assessment rules of property value that are normal for Capital Gains/Losses situations but not really applicable to online sales of an old smartphone or used dress.

Intuit, the makers of TurboTax, discusses 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 talk about the 1099-K form and online marketplace sales also say that proceeds from personal items below the original cost are not taxable.

However, 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 pretty slim.

And if they did, they likely were selling items that would have been 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.

There is little forward-looking guidance, yet it may require 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 challenge for those people that are just trying to make a few extra dollars with items they bought years ago.

Therefore, I believe the uncertainty surrounding this regulation prevents 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 to avoid or minimize paying income tax on those sales that should be tax-exempt.

Furthermore, the information from marketplaces is consistent in that the 1099-K forms they will issue include shipping and taxes as required by the IRS.

If sellers chose to report all of the reported gross sales as income, they would be paying taxes on revenues that generally include deductible expenses in a 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 limit their sales to around $500 to ensure shipping and taxes will not exceed the threshold to trigger the 1099-K form.

The bottom line is that this seems very unfair to sellers trying to make extra money to make ends meet.

The Coalition for 1099-K Fairness

This lack of clarity and increased burden in tax compliance for small and occasional sellers is well 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 this issue is ambiguous, the longer some people are likely to stay on the sidelines.

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 small sellers looking to make a few extra bucks 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.

To learn more about what 1099-K forms mean to small sellers and how they can reduce their tax burden from marketplace sales, please see my other post on this topic.

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