Cheap is chic for buyers, possibly taxable for sellers
Whether it is through thrifting, upcycling or going to garage sales, getting the most for their money is important to today’s consumers. Thrifting is just like it sounds: seeking out retail shopping experiences at thrift stores, flea markets and other businesses that sell used items. Upcycling is using something in a creative way, e.g., making earrings out of buttons. But, the other side of the saving coin is that some people are making money – the sellers.
“The sellers in thrifting and upcycling scenarios can find themselves running small businesses that can have new potential tax benefits, as well as responsibilities,” said Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. “When this happens, income has been realized and the business income and expenses must be reported to the IRS even if the seller isn’t intending to run a business.”
Infrequent sales – not a business, but still might owe taxes on sales
It is difficult to realize a profit when selling most household things that have outlived their usefulness for the owner. An example of a common sales transaction is selling a bike for $100 when the owner originally paid $500, which results in a $400 personal loss that is not tax deductible.
The outcome is different when selling things that have been given a new life; if someone finds a bicycle in the trash – they paid nothing for it – and they clean it up, put air in the tires and sell it for $100, they have realized a gain.
“Keep in mind that as long as these are one-time sales, the selling is considered casual, but if the sales become frequent or substantial, several factors should be considered to determine if the activity is a business,” Flores said.
In addition to frequency and regularity of sales, these are among the factors taken into consideration for determining if the activity is a business:
- Substantiality of sales
- Length of time the property was held
- Segregation of property from business property
- Purpose of acquisition
- Sales and advertising effort
- Amount of time and effort spent on sales
- How the proceeds of the sales were used.
People who want to avoid the hassle of finding a buyer, but would like to see a return on the things they no longer want, can get a tax break when donating those items to charity. The basic rules of charitable donations when planning to claim a tax deduction are to keep in mind that the amount of an itemized deduction is usually the item’s fair market value, household goods must be in good used condition or better, and to be sure to keep records (pictures, receipts, etc.) of what was donated.
Regular sales – the IRS could see this as business activity, even if it ‘feels like’ a hobby
When a taxpayer sells items occasionally, the IRS is likely to consider the seller to be operating as a hobbyist. An advantage of having a hobby is that related expenses might be eligible miscellaneous itemized deductions – but not beyond the total revenue generated from the hobby.
When sales are frequent with the intent of making a profit, the IRS might look at that activity as being a business. If the sales are done by a sole proprietor, the taxpayer must show purchases and sales on Schedule C, and they can offset income with ordinary and necessary business expenses. Plus, a loss can be shown.
Even in the absence of a traditional storefront, it is possible to become a member of the sharing economy or become a merchant when using Etsy, Shopify, the Marketplace on Facebook and other online selling communities. To learn more about how to treat money earned from sales, talk to a trusted tax professional.
By Teresa L. Clark
Teresa L. Clark came to H&R Block in January 2010 after working as a civil servant for more than 13 years. Since that first tax season she has written blog posts and talking points, edited content of all shapes and sizes, facilitated media interviews for the experts in The Tax Institute at H&R Block and supported the DIY team. Clark has a master's degree in integrated marketing communications from the University of Kansas and is a member of the Honor Society of Phi Kappa Phi.