Article Highlights:
- What is Taxable Income
- Section 61(a) of the Internal Revenue Code
- No 1099
- Cash Sales
- Reselling Sports and Concert Tickets
- Crowdfunding
- On-line Garage Sales
This article examines some of the often encountered scenarios that may have unexpected outcomes in response to the question, "What income is taxable?"
However, we must first examine Internal Revenue Code Section 61(a). According to that code section, gross income is defined as income from all sources, unless it is expressly prohibited by other provisions of the tax law. This definition includes, but is not limited to, payments made in exchange for services rendered, such as fees, commissions, fringe benefits, and the like. To put it another way, if you find a $10 money while out and about and decide to keep it, then that is $10 that you have to pay taxes on.
We should all be aware that the following income is taxable: W-2 earnings, 1099 income from interest and dividends, retirement accounts, profits from businesses and farms, investment income, capital gains, etc. However, there are additional forms of income that people disregard because they do not wish to declare the money or do not identify with taxable income. Here are a few instances:
No 1099
When certain income types are paid to a person and the amount received exceeds a specified threshold, usually $600, the payer of the income is obligated to provide a copy of the Form 1099 to the IRS. A lot of people have the wrong idea about the $600 and believe that income under that amount is not taxed. This is untrue; the $600 is only a filing threshold for 1099s, and all income—including that which is below the $600 level—is subject to taxation. The same is true for interest income, when a bank or brokerage firm must file a 1099-INT with a $10 filing threshold. The account holder is still required to record interest income on their tax return, even if it is less than $10.
Cash Sales
Since cash sales are difficult to track, some business owners choose not to include them in their revenue reports. Several years ago, the IRS developed the Form 1099-K in response to this behavior. This form required that third-party transactions, including those made by credit card companies, eBay, Stub-Hub, TaskRabbit (when hiring out their services), and others, be reported on 1099-Ks when an individual's transactions surpassed a $20,000 threshold and the total number of transactions was 200 or more during the calendar year.
Simultaneously, the IRS studied different kinds of companies to find out what proportion of revenue came from sales of cash. This allowed the IRS to determine whether companies were underreporting their revenue and failing to include a figure for cash sales by comparing the stated gross sale of the company to the 1099-K reported transactions.
The threshold for third-party 1099-K reporting was lowered to $600 starting in 2023, which can come as a shock to many who operate side businesses selling things online through platforms like eBay but haven't been filing their taxes for the business.
Reselling Sports and Concert Tickets
The profit made by someone who buys an event ticket and then resells it for more is taxable income. If a third company, like Stub-hub, handles the resale transaction, the third party must issue the 1099-K if the sales over the reporting level. With the recent reduction of the 1099-K reporting level to $600, some people could find this surprising. It won't take much to cross the $600 mark given the current cost of event tickets.
The question of whether this is a one-time gesture by the taxpayer or a deliberate attempt to make money is another one. If an infrequent act, the transaction can be recorded as a stock sale under the same guidelines as a short-term capital gain (a long-term capital gain, with a lower tax rate, needs tickets to be held for a year and a day, which is practically never practicable). Reselling tickets, however, is probably a business if it happens regularly and consistently, in which case Schedule C revenue reporting is required. In addition to income tax, a 15.3% self-employment tax is also applied to the proceeds from a Schedule C. The SE Tax rate and the 2.9% Medicare tax add out to 15.3%.
Crowdfunding
If contributions are made with a detached generosity, money received from online crowdsourcing platforms for uses other than business is often recognized as a nontaxable gift. However, a "gift tax trap" arises when a person creates a crowdfunding account to assist a third party (the beneficiary), but keeps the money for themselves before transferring it to the beneficiary.
Contributions are regarded as tax-free gifts to the fundraiser as the fundraiser is the legal owner of the monies. The money is considered a gift from the fundraiser to the beneficiary when it is transferred to them; if the amount exceeds $17,000 ($18,000 in 2024), the fundraiser must file a gift tax return and forfeit their lifetime gift and estate tax exemption. By designating a beneficiary on certain crowdfunding platforms, the fundraiser may avoid gift tax issues and ensure that the beneficiary receives the cash directly.
Two challenges must be overcome when raising capital for business projects: the taxability of the funds raised and the rules set out by the Securities and Exchange Commission (SEC) that restrict the maximum amount that may be given and the contributor's eligibility for an exemption from paying taxes. This article does not address these SEC regulations.
- No Business Ownership Interest Given – If no business interest is given and the fundraiser only provides the contributor nominal gifts, such as products from the business, coffee cups, or T-shirts, the money raised is taxable to the fundraiser.
- Business Ownership Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest. In this circumstance the money raised is treated as a capital contribution and is not taxable to the fundraiser.
On-line Garage Sales
Every now and then, some people may sell some of their personal belongings on websites like eBay, Etsy, or others. They will also receive a 1099-K if the total money received is $600 or higher. Since used personal items are typically sold for less than their cost, these transactions are typically not taxed; but, since the IRS is unaware of the specifics of the transaction, the gross revenues from the 1099-K must be reconciled on the individual's tax return and are typically handled like a stock sale. If there is a gain from the sale of personal property, that gain is taxable income; however, if there is a loss, the loss is not tax deductible. Alternatively, the IRS offers a reporting process that nullifies
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