Sports Card Sales And New 1099-K Laws
There are new 1099-K tax reporting laws coming into effect for 2022. If you sell sports cards, you must report your income to the IRS. If you have never filed before, you probably have many questions on sports card sales and new 1099-K laws. Hopefully, we have the answers for you.
Even if you are a veteran seller, changes are coming down the line. They do not affect the 2021 tax year. However, they apply to 2022, so any transaction you make now falls under the new rules.
Tax season is almost upon us. Here at Cardlines, we are ready to deduct our brand-new private jets and Lamborghinis. But we will take time off to help you navigate the new rules.
Caveat Lector On Sports Card Sales And New 1099-K Laws
As a caveat, we are not professional accountants at Cardlines. We are just providing you with general guidelines. Make sure to consult a professional when filing your taxes because this is serious business. Remember, the government nailed Al Capone on tax evasion. No one wants to go to Alcatraz because they didn’t report selling a PSA 9 Bo Bichette.
According to the law in the United States, you must report all income to the Internal Revenue Service. Therefore, you must self-report all income to the government or face possible consequences for failing to do so.
What Is Form 1099-K?
One of the primary tax forms is Form 1099-K, Payment Card, and Third-Party Network Transactions. As the name implies, the Form pertains to sellers using credit cards for payment on third-party online platforms.
The 1099-K was designed to increase the accountability of the growing online sector of the economy. The Form is intended for businesses with online components and accepts credit card payments via the internet. You may receive these from third parties you do business through. For example, credit card companies or eBay may send you a form.
You must fill these forms accurately. Reporting inaccurately may result in an audit or even paying too much tax to the IRS. Lord knows we can’t have that.
Will I Receive A 1099-K Form?
You will likely receive one if you have received regular credit card payments for online merchandise. In most cases, they are mailed out and received by Jan 31.
Traditionally, these forms were mailed out to individuals with a large volume of transactions.
- Individuals with both $20,000 profits AND over 200 transactions per year received the 1099-K Forms.
- For residents of Massachusetts, Maryland, Vermont, and Virginia, the threshold is $600 USD, irrespective of the number of transactions.
- For Illinois residents, the threshold is $1,000 USD with 3 or more transactions.
That remains the standard for the 2021 tax year. However, the standards will change for the 2022 tax year. So if you made over $600, you would receive the forms by Jan 31, 2023.
So, the short answer is unless you run a significant and severe card business, you will not receive a 1099-K Form for the 2021 tax year. But even modest sellers will receive one for the 2022 tax year.
What Is In A 1099-K Form?
Third-party platforms must fill a 1099-K Form which includes the gross total of transactions for each month in the applicable tax year. The Form will also have the annual total in a separate box. It should also include the payees’ taxpayer identification number.
Why Did The Criteria For Receiving A 1099-K Form Change?
In 2021 the U.S. Congress passed the American Rescue Plan Act of 2021, often known as the COVID-19 Stimulus Package. The plan included several measures to alleviate the pain of American citizens and business owners hit by the pandemic.
To pass the bill, the lawmakers searched for sources of revenue to offset costs. One method lawmakers came up with was to drastically reduce the level at which third-party companies had to report workers using their platform. Congress projected that this would raise $8.4 billion over the next ten years.
The money would come from people making a few bucks on Door Dash and eBay. Among those people are card sellers like you. Technically, this does not change the status of your income. After all, you are always supposed to self-report income to the IRS. However, in practice, this will make many people who would have either intentionally or unintentionally neglected to report their earnings and pay taxes on their profits.
What Has Been The Reaction To The Law Change?
There has been a good amount of backlash to the new standards. In theory, the law change does not alter much since there has always been an obligation to report. In practice, many people in the so-called “gig economy” do not report their small earnings.
Neither the platforms nor the sellers are happy with the change. The rules caught lobbyists for platforms like eBay and Door Dash unaware. These companies and their representatives on Capitol Hill have vowed to try to reverse the changes. After all, this change may scare people off their platforms, which is bad for business.
The eBay website exclaims:
“While eBay is unable to give tax advice to our sellers, we want to help make dealing with taxes as easy as possible. Our goal is to help you with these new requirements. We are lobbying Congress on your behalf to raise the $600 threshold. It’s a threshold that ignores the fact that income from selling used goods, usually sold at a price below the original price, is rarely taxable.”
Sports Card Sales And New 1099-K Laws: Which Platforms Issue A 1099-K?
The law applies to all third-party settlement organizations or TPSOs. So your next question, predictably, is what is a TPSO. A TPSO is an ongoing financial arrangement with the following characteristics:
- An organization that hosts a large number of accounts in a centralized organization. The number is usually 50 accounts or over. The accounts are unrelated to the central organization aside from using their auspices for transactions.
- An agreement or arrangement governs the central organizations and the hosted accounts, usually in the form of a contract.
- An organization that provides standards for the conduct of transactions and the settlement of disputes.
- Guarantees the provider’s payment in return for goods sold to customers.
Any third-party platform which sells cards fits this description. That would include:
- Facebook marketplace
What Do You Do With Your 1099-K Form?
You do not attach the Form to your tax returns in most cases. Instead, you use the figures and enter them into your tax return as income from a small business. Then maintain the 1099-K Form for your records.
The exception is if you receive your Form with tax already withheld. In that case, mail it in with your filed return.
What Should You Do If You Haven’t Received A 1099-K Form
Keep in mind that unless you meet the old criteria ($20,000 plus over 200 annual transactions), you will not receive a form in January 2022. You will only receive one based on the new criteria in January 2023.
If you are supposed to receive one and haven’t, it is your responsibility to ensure it arrives. The IRS suggests you do the following: “If you have not received an expected 1099 by a few days after that, contact the payer. If you still do not get the Form by Feb 15, call the IRS for help at 1-800- 829-1040.”
If you receive your Form after filing your taxes, you still must report the relevant income. In that case, report the figures by filing Form 1040X, “Amended U.S. Individual Income Tax Return.”
Sports Card Sales And New 1099-K Laws: eBay Profits
In the tax year 2021, eBay will continue to send out 1099-K forms to individuals with a high volume of transactions. However, 2022 will see the company change its policy per the new tax laws.
Here is what eBay has to say about implementing the new rule:
- Starting on Jan 1, 2022, eBay and other marketplaces are required by the IRS to issue a Form 1099-K for all sellers who receive $600 or more in sales.
- The new tax reporting requirement will impact your 2022 sales and taxes that you file in 2023—it will not apply to your 2021 sales and taxes that you file in 2022. Throughout 2022, look for updates from us that will help explain what’s changed and what you need to do next.
- If you haven’t already given us your Social Security number (SSN) or Individual Tax Identification Number (ITIN), we’ll ask you to provide it once you reach $600 in sales.
- Before January 2022, you may have received a Form 1099-K for selling more than $20,000 and 200 transactions, or selling in states with reduced thresholds. A Form 1099-K for the year 2021 will be provided to you by Jan 31, 2022.
- No need to worry— you only pay taxes on profits. You won’t owe any taxes on something you sell for less than what you paid for it. For example, if you bought a bike for $1,000 last year, and then sold it on eBay today for $700, that $700 you made would generally not be subject to income tax.
Sports Card Sales And New 1099-K Laws: Venmo Profits
For 2021, Venmo will continue to send 1099-K Forms according to the old criteria. Therefore, the changes will only take place in 2022.
Keep in mind that Venmo is only obligated to report individuals who receive payment through the sale of goods and services. So, you can get past this by making sales through friends and family sales. However, we do not recommend this. Your transactions will not be guaranteed, and technically it counts as tax fraud.
Sports Card Sales And New 1099-K Laws: Pay Pal Profits
PayPal is the parent company of Venmo. Therefore, it has similar rules.
Like all companies, it will not be implementing the new rules for the 2021 tax year. Like Venmo, PayPal reports goods and services sales and does not address friends and family transactions. Still, we recommend conducting all business transactions through the proper channels.
Other Important Tax Information For Card Sellers
Whether or not you need to pay taxes for the income is a different story. According to U.S. law, you do not have to pay taxes on a hobby. However, your definition of a hobby and that of our friendly Uncle Sam may differ substantially.
How Do I Know If My Card Business Is A Hobby Or A Business?
The main criteria differentiating for-profit activity from our hobby-oriented activity is the level of sustained economic gain. If you have earned a profit on card sales for three out of the five most recent years, you are running a business for tax purposes.
Even if your card sales operation doesn’t meet the criteria, it still may be considered for profit by the IRS.
The IRS Criteria
I don’t want to get you in trouble with the taxman. So, I will quote the IRS guidelines in full:
In distinguishing between a hobby or business activity, consider all facts and circumstances concerning the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. However, you must generally consider these factors in determining whether an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Do you have personal motives in carrying on the activity?
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Do you depend on income from the activity for your livelihood?
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
- Whether you were successful in making a profit in similar activities in the past.
- Does the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
As you can see, the criteria can be confusing and vague. However, I can simplify it somewhat. If you are making money consistently by selling cards, the chances are that you are running a for-profit business from the perspective of the IRS.
What To Do If Your Card Sales Count As A Hobby
Remember, no matter what, you have to report the income. If you do qualify as a hobby from the perspective of the IRS, reporting the income is quite simple:
- Get a Form 1040, which is the U.S. Individual Income Tax Return. You can download one here
- Report your hobby income on schedule 1, line 8
There is good and bad news if you do qualify as a hobby. Do you want the bad news first? Sure. You cannot deduct expenses for a home office for a hobby. Until 2018, this was an option. However, tax reform removed the possibility of hobby expense deduction. That deduction (which can be worth anywhere up to $1,500) is only relevant to income-generating business activities.
I promised some good news. You do not have to pay income tax such as the unemployment tax for your hobby. If you are running a hobby, you will not be required to pay self-employment taxes.
What To Do If Your Card Sales Count As A Business
If you have been consistently profiting off of your card business, you will need to pay income tax on it. That means complying with a completely separate set of rules than those intended for hobbyists.
Card business owners must declare their income on Schedule C. You will then be required to pay both income tax and self-employment tax.
Here is how to do that:
- Collect your records meticulously.
- In most cases, you will use Schedule C in form 1040. However, if your company is a corporation, fill out form 1120.
- Download form 1040.
- Report your income or loss as Schedule C on the Form
- Do the same for your business-related expenses. Indicate them on form 2106. You can download that Form here.
- The results of your expense report will translate to your Schedule A.
What Is A Business Expense?
The IRS defines a business expense as one with the two following characteristics:
- It is necessary for the function of the business. The bar for this is not exceptionally high. However, the expense must be relevant and valuable to your business needs.
- The expense must be a normal and common one. That means that other comparable businesses also accrue the exact costs.
So, in both cases, you can’t deduct your hot tub. Sorry, everyone.
Bottomline On Sports Card Sales And New 1099-K Laws
The new tax rules do not fundamentally change your obligations as a sports card seller. You always were required to report profits. However, the rules do mean that there is more scrutiny on small sellers. In addition, the U.S. government depends on you to fill a budgetary hole opened by the Covid stimulus package. Therefore, make sure that you follow the rules closely and by the letter.
There is a chance that the laws will be revoked. The prominent players in the “gig economy” have a strong lobby on Capitol Hill and want these changes repealed. But don’t count on a change. Instead, prepare for the new rules now, so you are not blindsided.