I recently had an online deal on a guitar go south on me when, after I executed the online purchase, and after I made payment through the online platform, the seller was faced with Federal tax forms to complete before he could receive payment. It seemed he'd be paying income tax on the money he recouped upon selling an item that he'd purchased just a few months ago. This was not a situation where he'd marked it up for resale. This was a break-even.

I for one have spent many years buying and enjoying expensive hobby nonsense stuff, with the knowledge that I could and would sell them eventually for what I paid for them. Thus, they were free to enjoy but for the cost of money over time. But I was able to do this with the freedom that I wouldn't have to pay income tax again on the money when it made it back to cash in my account.

It occurs to me that this taxation will greatly deflate online sales of expensive items in this way. Guns, watches, guitars, anything that runs through an online large scale payment platform.

Are we missing something here? Some way where when you do your taxes, you just have to prove that you paid that same amount for the item, and thus, you would write-off that income? And if so, does it matter if it's same year, vs. owning it over multiple years? Perhaps that'd only be if there were gains (short-term capital gains). If this is something that can be washed away at tax time, these platforms had better do a better job of educating sellers, because this guy bailed on me over it, and they subsequently lost their cut of the sale.

I think the reporting threshold dropped a year or so ago to something like $600 so companies like eBay send a 1099 to people that never got that before.
That requires another form on your tax return and you should keep some sort of proof for the cost of those items if you were to have the IRS ask. If your guy wasn’t making any money as he told you, he owes no taxes. If he sells much there he will still get a 1099 if his total is over that threshold. The individual item sale amount isn’t the trigger, it’s his total annual sales.
Before this they would only send that 1099 if your gross sales were something like $20,000(?) or so.
You were still supposed to pay taxes on gains below that but without the IRS knowing, few people did, I would guess. Just like people will continue to do on places like marketplace or Craigslist where they aren’t directly involved with the transaction and don’t handle the money.

The Income Tax situation has not changed. The sell will be "other income", "hobby income", or capital gains. The IRS rules on 1099's has changed. Online sales must have a 1099 for annual sales over $600. Currently Paypal friends & family will not prompt a 1099. This is reporting nightmare for online hobby sales as your costs are higher than proceeds, but hobby losses are not allowed as a business loss & the tax result is zero. The recent IRS 1099 penelty increases have caused increases in 1099's with a result of more 1099 errors. IRS's computer letters demanding additional tax due have increased dramatically & most of the letters are caused by 1099's.

What platform, how much money are we talking about, and what guitar?

I suppose the platform (can’t we just say eBay, reverb, etc.?) could require the seller to provide information so that a 1099-K could be completed. The seller and IRS would both receive copies. The seller would then report the sale on his income tax return. His basis in the guitar would be subtracted from the selling price to calculate taxable gain, if any.

The filing threshold for a 1099-K changed from $20,000 and 200 transaction for tax years ending before 2022 to $600 and any number of transactions for tax years ending after 2021. According to the IRS website, the 1099-K reports payment card and third party network transactions to the IRS to increase voluntary tax compliance.

That’s my guess anyway.

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the freedom that I wouldn't have to pay income tax again on the money when it made it back to cash in my account.

You don't pay tax again on the money you put in, in any scenario. Net gain is the only amount in question.

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Are we missing something here? Some way where when you do your taxes, you just have to prove that you paid that same amount for the item, and thus, you would write-off that income?

Just save your receipts. You probably (hopefully) already do this for warranty purposes.

Sometimes you gain, sometimes (oft-times?) you lose. It's the net gain in a year that would matter. Sell that guitar for a loss, that loss offsets the gain on selling an old car.

The problem with receipts is that a lot of the stuff I buy and sell, often online, is purchased used for cash from swap meets, gun shows, etc. I don't have a receipt or an easy way to document what I paid. I try to avoid using PayPal or eBay to resell for this reason.

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Originally posted by joel9507:
Just save your receipts

If I'm not mistaken hobby losses are non-deductible. In the OP's example, it is near certain the seller purchased the guitar with monies which were previously taxed as income. The guitar was also most likely subject to state sales tax when purchased new. It's complete and total taxation overreach for the proceeds from the sale of used personal items to be considered taxable income.

When you sell something that doesn't have an original receipt, I'd write something similar as a record detailing as much as you reasonably can.
I suspect in the unlikely case of a real audit, as long as you have some receipts and have been keeping some sort of businesslike record of the rest, they might consider that as proof (accountants feel free to chime in on that). Besides, they are actually looking to collect more money than it costs to enforce so unless you do something that raises a big red flag or have lottery-like bad luck, your not likely to have them knocking on your door.

The government causes inflation, so now it wants to be sure to tax you on it. Say you bought something for $1000, and held it for three years at today’s inflation rate. You sell it for $1200, actually taking a small loss in current dollars. The IRS will add insult to this by taxing you on that “gain.”

I suspect it isn't paying taxes, but withholding taxes on the transaction. The seller may have gotten himself into a category with the IRS that requires withholding on transactions that most people are not subject to. If there was no profit on the transaction, he would get the withheld funds back when he files, assuming deductions are taken appropriately.

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Originally posted by joel9507:
You don't pay tax again on the money you put in, in any scenario. Net gain is the only amount in question.

Here is the key question in my mind. If your financial situation is such that you cannot otherwise deduct (i.e. you just use standard deductions for kids), so no interest or charitable donations because they don't yet outstrip the value of the standard deductions, -- can you still offset the new "income" in some way when doing your taxes. Like, is this in some investment area where I can claim the 1099 income and a 1099 loss of the original purchase price to wipe it clean?

The sale of personal property at a gain, proceeds in excess of cost is a taxable capital gain, short term (held less than a year) or long term if held over one year. Sale of personal property at a loss is a non-deductible capital loss. Heads they win, tails you lose.

"Save your receipts." Who does that for a hobby?

I keep receipts only until they show up on my credit card statement, at which point I shred them.

I only keep receipts if there's a warranty or a high priced item.

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Originally posted by r0gue:

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Originally posted by joel9507:
You don't pay tax again on the money you put in, in any scenario. Net gain is the only amount in question.

Here is the key question in my mind. If your financial situation is such that you cannot otherwise deduct (i.e. you just use standard deductions for kids), so no interest or charitable donations because they don't yet outstrip the value of the standard deductions, -- can you still offset the new "income" in some way when doing your taxes. Like, is this in some investment area where I can claim the 1099 income and a 1099 loss of the original purchase price to wipe it clean?

Deductions, whether standard or itemized, are subtracted from taxable income.

The guitar transaction is included in the figuring out what taxable income is. By law, musical instruments are collectibles subject to up to 28% capital gains tax. The losses on other investments are subtracted from capital gains. If you have enough losses, it’s possible to offset the gains on collectibles. You can take the losses on the sale of collectibles if you held them for investment. If you held the for your personal use or enjoyment, You can’t take the losses.

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"Save your receipts." Who does that for a hobby?

I believe the IRS determined that if you're making money that's not a hobby but rather an income producing endeavor.

If you're not making money that's fine too, but you'll have to be prepared to prove it.

Let's simplify.

I buy a $1000 set of golf clubs. And I decide I hate them and sell them a week later for $550 on eBay. They send me after fees $500.

I believe I will be taxed $500, and I do not believe there is a way for me to deduct the $500 more that I paid, let alone the $50.

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Originally posted by r0gue:
Let's simplify.

I buy a $1000 set of golf clubs. And I decide I hate them and sell them a week later for $550 on eBay. They send me after fees $500.

I believe I will be taxed $500, and I do not believe there is a way for me to deduct the $500 more that I paid, let alone the $50.

The fees and shipping are not excluded from the 1099 you will receive. In your example it will be for $550. You have to do that yourself when filing taxes.

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Originally posted by r0gue:
Let's simplify.

I buy a $1000 set of golf clubs. And I decide I hate them and sell them a week later for $550 on eBay. They send me after fees $500.

I believe I will be taxed $500, and I do not believe there is a way for me to deduct the $500 more that I paid, let alone the $50.

You’d have a $500 loss. There’s no tax owed on a loss. Since these are personal items, you cannot offset any other income you might have with the loss.

Since the transaction is below the threshold, you wouldn’t get a 1099-K and no further effort is required on you part.

Changing the numbers a little: you sell the clubs for $750 and there’s still the $50 fee. You have a $300 loss. The transaction is over the threshold, so you get a 1099-K that says you sold something for $750. On your income tax return, you’ll report that you sold something for $750 that cost you $1,000 and you paid a $50 fee. In other words, you’ll show a $300 loss that will have no effect on your taxes otherwise.

The guy with the guitar on reverb was mistaken in thinking he would somehow owe tax on the transaction if it was truly break even for him.

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Originally posted by trapper189:...you sell the clubs for $750 and there’s still the $50 fee. You have a $300 loss. The transaction is over the threshold, so you get a 1099-K that says you sold something for $750. On your income tax return, you’ll report that you sold something for $750 that cost you $1,000 and you paid a $50 fee. In other words, you’ll show a $300 loss that will have no effect on your taxes otherwise.

Ok, so there is a place on a form where I show my math on that individual transaction?, and the loss is deducted from the sale, not my income, thus muting out the 1099k report from eBay or Reverb? Because as I've said, I do not, and really can not itemize my normal tax return.

Separate form for reporting gains or losses, this has nothing at all to do with whether you itemize or not as I think someone said earlier. If you had gain it would flow into body of your Form 1040, in your case you compute the loss, include the form and it just ends there.

The reporting is so easy a caveman can do it. For amounts so small and obviously sold at loss and not for profit or as part of business there is almost precisely zero chance of any questions arising from the reporting of a sale and loss.