Garage Sale Money and Capital Gains: What You Should Report to the IRS
Garage Sale Money and Capital Gains: What You Should Report to the IRS
Garage sales have been an emblematic American tradition for decades now, providing a very unconventional yet gratifying way to get rid of stuff piling up around the house and at the same time earning a few extra dollars. Though it might seem like an ordinary activity, these neighborhood events have seen a remarkable rise in the business world, where they are now worth millions of dollars. From recent data, it is estimated that garage sales make a weekly income of $4.2 million which surpasses the $200 million a year. Although it may not appear so at first glance, approximately 165,000 garage sales are happening weekly across the country. This tells us that the activity is not only a recreational and hobbyist activity but a strong economic force as well.
Like any other financial operation, the Internal Revenue Service (IRS) has set standards and rules on how to report income generated from garage sales. Most people who sell small items on these platforms believe that their humble earnings are exempt from taxes. The reality however is that reporting some gains will still put you in trouble with tax authorities.
Understanding Capital Gains and Losses
The core of the story is to be able to define what capital gains and losses are. A capital gain is realized when you sell an appreciated asset for a price higher than what you paid for it (cost basis). As a result, the capital loss happens when you sell the asset for its basis cost which is lower than its price.
At garage sales, it seems that every item is sold at a loss. To illustrate, if you bought a lawnmower for $250 and later sold the same at your garage sale for $50, you made a loss of $200 in personal value. Though the loss suffered is not deductible, the same implies that you are not liable for taxes on the $50 earned from the sale.
Still, this is not always the situation when you sell an item for a higher price than what you originally paid for it. If, for example, your great-uncle gave you a vintage mower you sold on eBay for $100, it will also be counted. In this example, your capital gain is $100, which tax authorities will require you to report as the taxable income you have to pay to the IRS.
The Three Levels of Selling
To better understand your tax obligations, it's essential to categorize your selling activities into one of three levels: To better understand your tax obligations, it's essential to categorize your selling activities into one of three levels:
The Casual Seller
Your occasional sales seem to be more for decluttering your home and removing unwanted items. If this is the case, you are classified as a casual seller. As just so long as you sell your assets for less than their purchase price you usually do not have to report your earnings to the IRS.
The Hobbyist
Amateurs auction their stuff whenever they want to, however they do not do it for the sake of money. They may be able to subtract expenses related to their hobby as miscellaneous itemized deductions, but they won’t be allowed to deduct more than the money they’ve earned from the hobby. Furthermore, a total of 2% of your adjusted gross income, which exceeds the deduction, should be considered.
The Business Operator
If you have sales that occur as a result of a frequent activity meant to earn profits, the IRS may view your task as a business. In this scenario, you would be regarded as a sole proprietor and will have to put your petty cash earnings and sales on Schedule C of your tax return. Another benefit of the business operation is reducing your tax burden since you will be able to offset your income with ordinary and necessary business expenses that may lower the amount of tax you are going to pay.
Reporting Requirements for Casual Sellers
The majority of garage sale enthusiasts who belong to the 'simple resaler' category, where you will find the reporting requirements fairly simple. So as long as you sell your assets for a lesser value than what you had paid for them, you typically don't need to report your earnings to the IRS.
Yet, it is advisable to keep a record of your initial prices of purchase and prices at which you disposed of. Selling an item for more than its cost basis, even if you are a hobby seller, results in capital gain, which must be reported as taxable income.
For instance, you sold a vase, an antique one, for $200 at the garage sale but you originally bought it for $100. Here, the $100 gain was considered as a capital gain and this has to be reported on the income tax return.
Charitable Donations as an Alternative
If you find yourself with items that sell at a garage sale would be probably a high price, but donating them to a charitable organization is a good alternative instead. Thus, you can specify the fair market value of donated items as an itemized tax deduction after you get a receipt and make a detailed list of donated items.
This strategy not only prevents additional capital gains taxes but also increases the amount of money you could donate to the people in need in your area. Beware that the IRS will be looking at the donation of high-value goods very closely, so it is very important to accurately describe the condition of the items you donate and their value.
Reporting Requirements for Hobbyists and Business Operators
With the increase in the frequency of your selling activities and the growth of your profits, the more complicated tax implications will be. For example, the IRS may categorize your sales as a hobby rather than as a casual business if it deems them to be such. In that case, you will be required to report your earnings and expenses differently.
Hobbyist Reporting Requirements
The hobbyists sell the products only occasionally and they do not do that for profit but for fun. They can subtract all their hobby-related expenses as miscellaneous itemized deductions, but the total amount of deductions must not exceed the total income produced by the hobby.
In addition, the amount of deductible expenses is limited to the amount of expenses that are higher than 2% of the adjusted gross income. For instance, the deductible hobby expense for the year, which is $1,500, is possible only if it is greater than $1,000 (2% of your adjusted gross income of $50,000).
It becomes necessary for hobbyists to keep a comprehensive tab on their sales, expenses, and any capital gains or losses incurred. Not doing this, in return, may cause the IRS to consider your activities as a business, which means you need to follow different reporting requirements and thus be subject to penalties.
Business Operator Reporting Requirements
If you are doing selling activities very often and those are made to make a profit, the IRS may classify your endeavor as a business. For your business, you will be classed as a sole proprietor and you will need to record all expenses and revenue that you make and report on this on Schedule C of your tax return.
One of the major merits of being in business is that you can use your income to compensate for the expenses that are ordinary and necessary and are used for business purposes, hence reducing your total tax liability at the end of the year. But at the same time, you must ensure that you register everything properly, which includes the payments you make for your stocks, sales, costs, and perhaps some gains and losses.
It is, however, worthy of note that the IRS closely scrutinizes businesses that show losses every single year. The IRS may impose limitations on your deductions if your business is not viewed as a serious money-making venture, or it may assess you differently for tax purposes.
Seeking Professional Guidance
The simple regulations regarding the garage sale income and the capital gains may seem to be uncomplicated, but in fact, reality is more complex. Each situation has peculiarities. For example, the number of times you sell, the value of items that are sold, and the accuracy of your record keeping can be the influencers of your tax obligations.
To make sure that your tax activity is within the regulations of the IRS and gives you all the tax benefits, it is highly advisable to ask for a qualified tax expert. A tax expert will help you to determine the reporting requirements that will be most suitable for your circumstances advise you on documenting best practices and also, identify deductions or strategies that will reduce your liability tax.
In this case, hiding taxable income or giving misleading financial information can cause you to be forced to pay high fines and interest from the IRS. A tax professional can be a great asset in this regard, as they will help you to unburden yourself from the worry that you are handling your garage sale activities under the law and you are fulfilling your tax obligations accurately and efficiently.