When does Paypal income start being reported to the IRS??

sayheykid54 · October 13, 2009 7:49AM

My understanding is that starting in 2010 sellers that have over $25,000 in Paypal transactions will have that income reported to the IRS. Is that information correct?

storm888 · October 13, 2009 8:27AM

Unless there has been a change - and I don't think there has - this is the law:

The Housing and Economic Recovery Act of 2008.

Starting in 2011, banks or other companies that process credit cards must report
the amount of the payments a merchant receives on card transactions to the IRS.
The law will not apply to merchants doing less than 200 transactions totaling less
than $20,000.

................

The original proposal, was $600.00 per year.

EBAY/PayPal lobbied to raise the number to $20K.

..........................

I am far too lazy to look for the statute, but the lingo in the abstract designates:

"...payments a merchant receives on card transactions ..."

This would/might, seemingly, exempt e-checks from the requirement.

It might include debit-cards, if "debit cards" are in either the
statute or the purpose section of the passed Bill. Also, the
Service could argue that debit-cards are included - whether
they were meant to be or not - but the Service would likely
have to prove their point in court. I think they could do so,
but the lingo can be argued both ways.

Currently, absent a FISA document, the Service would usually
need to chat with a judge before obtaining the subject records.
That may seem like a "formality," but it's not.

...................

The extra taxes collected are meant to pay for money that
was given to banks and insurance companies in the first
bailout. And, for sundry tax-breaks and real-estate rebates
that may have helped some consumers.

sayheykid54 · October 13, 2009 8:41AM

I would then assume the Merchants or sellers that have income reported would then be under more intense IRS scrutiny. The change could really hurt Ebay.

Large Ebay sellers would then be required to keep more detailed profit/cost information.

storm888 · October 13, 2009 8:51AM

"...Large Ebay sellers would then be required to keep more detailed profit/cost information..."

//////////////////

That group is already largely compliant.

The target is MILLIONS of little people.

......

They love to chase the waitresses and
other low-hanging fruit. Easy pickings.

larryallen73 · October 13, 2009 9:06AM

Also the law is that all of us are supposed to report ALL INCOME.

storm888 · October 13, 2009 9:13AM

<< Also the law is that all of us are supposed to report ALL INCOME. >>

/////////////

ALL of the EBAY surveys indicate a VERY high level of compliance.

.......

There will be some fun issues regarding used-merch, purchased
years ago and now being sold by little folks at below cost.

dontippet · October 13, 2009 9:34AM

<< Also the law is that all of us are supposed to report ALL INCOME. >>

I agree with you.

grote15 · October 13, 2009 11:49AM

The govt altready gets too much of my money as it is..

packCollector · October 13, 2009 1:21PM

I have been reporting for a few years now , does it suck? yes. is it that big a deal? no for the most part it is easy to deduct expenses on a schedule c to ofset profits , you jsut need to keep organized records

hammered · October 13, 2009 2:46PM

<< I have been reporting for a few years now , does it suck? yes. is it that big a deal? no for the most part it is easy to deduct expenses on a schedule c to ofset profits , you jsut need to keep organized records >>

True statement.
Lots of ways you can limit the cut that Uncle Sam takes. Computer usage, home office space, mileage to the PO for starters.
If IRS is going to be receiving more detailed paypal records of ebayers, then the affected sellers should start keeping records of all expenses right now. At very latest start on Jan. 1, 2010, I would think.

stevek · October 13, 2009 4:14PM

<< Also the law is that all of us are supposed to report ALL INCOME. >>

Yes that's exactly right...but with an ebay business (income) ya only pay taxes on the profit...all expenses are deductible against the income....you can deduct expenses such as gas and mileage on your car making trips to the post office, etc, etc, etc...everything associated with operating the ebay business is deductible.

alnavman · October 13, 2009 9:48PM

will paypal be required to issue something like a 1099 to folks for the amounts sent to IRS, does anyone know?? I know that other reported incomes from stuff like bonds, savings accounts, etc require something sent

sayheykid54 · October 13, 2009 10:05PM

I know a couple collectors that are selling their cards and collectibles for a lot less than they paid for them. I would think that based on the current economy some Ebay sellers are actually losing money selling/buying on Ebay.

On the flip side can they take a loss on their Ebay business??

stevek · October 13, 2009 10:41PM

<< I know a couple collectors that are selling their cards and collectibles for a lot less than they paid for them. I would think that based on the current economy some Ebay sellers are actually losing money selling/buying on Ebay.

On the flip side can they take a loss on their Ebay business?? >>

Yes - those losses are deductible against earned income from any other sources..

stevek · October 13, 2009 10:45PM

<< 

<< I know a couple collectors that are selling their cards and collectibles for a lot less than they paid for them. I would think that based on the current economy some Ebay sellers are actually losing money selling/buying on Ebay.

On the flip side can they take a loss on their Ebay business?? >>

Yes - those losses are deductible against earned income from any other sources.. >>

and make sure ya have all the buy/sell paperwork in case of an IRS audit or inquiry.

alnavman · October 13, 2009 11:42PM

how does everyone deal with the original pricing on items that you don't have any type of documentation on??? either you can't remember what you paid for it or you don't have the payperwork anymore? I have many items that were bought 10-15 years ago that I have no idea what I paid for them. thanks for any advice. al.

jswieton · October 14, 2009 2:47AM

I have a question about this and in no way does this apply to me since I hardly sell anything online. It also might seem like an idiotic question but I have never sold enough volume to even consider paying taxes on eBay sales.

Do you only have to report to the feds if you are net positive $20k at the end of the year from eBay sales? For example, I sell $25k worth of baseball cards on eBay in march. I then buy $10k worth of baseball cards in June. Would this make me exempt from paying any taxes on the original $25k since I only profited $15k at the end of the year, even though the baseball cards could be sold for cash?

larryallen73 · October 14, 2009 3:00AM

This conversation is heading toward the IRS "hobby loss" rules. If you can show it's a legit "business" your baseball card collecting (including visiting shows all around the country) could be tax deductible! It thus could become beneficial to report your income (and expenses) properly on a Schedule C. Odds are you can easily come up with enough expenses to show little or no profit. Though we all like to trumpet our great successes in selling a penny card for $50 we all have sold a lot of $50 cards for $5. Keep (or create) some documentation of purchase and you should be fine.

storm888 · October 14, 2009 5:35AM

<< ..... Do you only have to report to the feds if you are net positive $20k at the end of the year from eBay sales? For example, I sell $25k worth of baseball cards on eBay in march. I then buy $10k worth of baseball cards in June. Would this make me exempt from paying any taxes on the original $25k since I only profited $15k at the end of the year, even though the baseball cards could be sold for cash? >>

////////////

ALL income is to be reported by the taxpayer.

Taxes are paid only on profits.

Profits are determined AFTER costs/fees/expenses
are deducted.

Your Q on "exempt" inventory is way off base,
and not relevant to taxes due as a result of
PayPal's reporting scheme. (If the Q is academic,
there could be FIFO/LIFO issue that MIGHT help
you. If the Q is an actual circumstance, your tax-prep
person can guide you on F/L issues.)

EBAY Chapter 12

................................

The numbers that PP submits to the taxing authorities will be shown in the
PP control panel; just as net receipts/payments always have. (There may
be an opt in/out for a mailed 1099, but that will be announced later.)

Cost documentation - if purchased via PayPal - can be pulled at the site. If
you have trouble going back "to the beginning," call PP and they will help you
find the numbers.

Purchase receipts should always be retained.

Receipts for ALL EBAY fees and postage fees should always be retained.

A record of cost of goods sold that was not prepared contemporaneously
with your purchases will generally be accepted if that is all you have. (Make
a notebook and list the items you buy/bought AND your cost of the goods.)

Unless you are grossing large numbers, it is often an invite to problems
if you start deducting "homeoffice space"and "mileage." (Your tax-prep
pros can advise on that issue.)

99% of "audits" on the relevant issues are done via the mail. The Service
is not interested in chatting in person, unless the docs you send them
don't meet their minimum specs.

If you get called in for a visit, NEVER go without a tax-lawyer or a rep that
has EXPERIENCE in such showups. (Such pros KNOW the correct answers
to the Qs. They can also force a relook at past returns that may generate
credits to offset current liabilities. They are wizards and are worth MORE
than they charge.)

.......................................

The PP change will have little effect on MOST sellers.

The publicity surrounding the change will likely increase
compliance a little, but since compliance is already high,
any increase will be minimal.

Out of the gate, we could see more sellers offering "local
pickup," and encouraging "paper payments" by sundry
means.

.....................................................

IRS

Business or Hobby? Answer Has Implications for Deductions

FS-2007-18, April 2007

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.

In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

Does the time and effort put into the activity indicate an intention to make a profit?

Does the taxpayer depend on income from the activity?

If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Does the activity make a profit in some years?

Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:

Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.

Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

Further information is available in IRS Publication 535, Business Expenses

Pub 535 - The Full Scoop

30

stevek · October 14, 2009 6:22AM

<< I have a question about this and in no way does this apply to me since I hardly sell anything online. It also might seem like an idiotic question but I have never sold enough volume to even consider paying taxes on eBay sales.

Do you only have to report to the feds if you are net positive $20k at the end of the year from eBay sales? For example, I sell $25k worth of baseball cards on eBay in march. I then buy $10k worth of baseball cards in June. Would this make me exempt from paying any taxes on the original $25k since I only profited $15k at the end of the year, even though the baseball cards could be sold for cash? >>

If your accounting system is setup as the 10K being inventory (accrual accounting), then yes you would have to pay taxes on the inventory.

Google "accrual" versus "cash" accounting and you'll find the answers in detail to your basic question here.

gemint · October 14, 2009 8:34AM

I don't think the IRS would want me to start figuring my hobby as a business. If I start deducting for my home office, my travel, my grading fees, my supplies, my losses on cards that don't grade out, etc, I would likely end up a net negative. The downside is I would likely have to hire an accountant to figure out my liability. As others have said, I have a lot of inventory which I have no clue as to how much I paid for it.

Examples:

I sell a PSA 9 Bill Ripken FF error card for $30. I pulled it from a pack 20 years ago when I paid $5 per cello pack when the card was hot. I spent roughly $200 on packs at the time, $5 for the grading fee and shipping plus eBay fees to sell it. I have 1500 other worthless 89 Fleer cards from those purchases which will likely be donated to charity or thrown away. What's my gain?

I sell a PSA 8 1971T common for $15. It came from a $5,000 set I purchased and broke up. Is my cost $5,000 / 752 = $6.65 + $5 for grading = $11.65? Then how do I factor in the cost of the roughly 50% of the set that is O/C or in mid to low grade that aren't even worth reselling? Am I forced to sell them for a loss to show the negative transaction, incurring more eBay fees (throwing good money after bad)? Or am I able to write those losses off?

When does Paypal income start being reported to the IRS??

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