What to Do if You Receive an IRS Form 1099K?

If you're reading this blog post, you've probably received an IRS Form 1099-K, and you want to know what to do with it.

Can you ignore it, or do you need to report it on your tax return?

Short answer, you do need to report it on your tax return or face receiving a nasty letter from the IRS with a tax due amount along with penalties and interest.

Keep reading, and learn how to best report a 1099k on your tax return so you can avoid IRS penalties. Just so you know, this blog post is updated with the latest IRS regulations, including handling 1099-K forms sent in error and dealing with personal sales, ensuring you maximize your tax savings while staying compliant.

In this post, I'll walk you through several scenarios, including personal items sold at a loss, incorrect 1099-K forms, and how to report personal sales with profit. With my guidance, you'll learn how to navigate these situations confidently, ensuring you don't miss out on any tax deductions or fall prey to common pitfalls.

Reporting threshold

Before we dive in, you probably already know that the IRS delayed the new 1099K reporting rules until 2024 and increased the reporting threshold to $5,000. If you need information on that, you can check out and watch my YouTube video here which explains everything.

Okay, so here we go.

Scenario Number One: Personal Items Sold at a Loss

Imagine that you cleared out your garage and sold a bunch of old stuff on eBay. Throughout the year, these sales added up to $5,000, triggering a 1099K Form.

Now, you're not exactly sure what the original cost was for all the stuff, but it's safe to say it was probably over $5,000.

Let's suppose you did some figuring and you estimate the amount you spent for everything was $10,000.

Here's how to handle this on your tax forms.

In this case, we're talking about personal items sold on eBay that were bought a long time ago at a cost higher than what they were sold for. So what you've got is called a personal loss.

Now, the thing is the IRS doesn't let you write off these types of losses. But remember, you've still got to report this on your tax return. If you don't, the IRS will just assume the whole $5,000 is taxable. You'll get a deficiency notice from the IRS with taxes due, along with penalties and interest. 

This is new for this year, and this is how my software shows how to do it. Below, you'll see Schedule 1 (Form 1040) - Additional Income and Adjustments to Income. There's a Part I and there's a Part II.

Part I is where you show Additional Income. So down on Line 8z, Other Income, you'll list out, "FORM 1099-K PERSONAL ITEM SOLD AT A LOSS".
Enter $5,000. This will be $5,000 of additional income that will flow to Page 1 of Form 1040.

Now on Part II, Line 24z, Other Adjustments, you'll indicate "FORM 1099-K PERSONAL ITEM SOLD AT A LOSS". You'll enter $5,000. This is the amount of money you paid for the items.

So this $5,000 will flow to Page I of Form 1040, negating the previous $5,000 of income and basically bringing it down to a net of zero.

So no income or loss was reported.
So this effectively zeros out the $5,000 1099K.
Done.

It's pretty straightforward and works for the fact pattern I've just outlined.

What if You Don't Have a Receipt for Your Personal Item Sold?

Now, a lot of folks wonder what to do if they don't have all the receipts and can't remember what they paid for certain items.

This is a real pain point.

If the IRS ever comes knocking for an audit, you're supposed to be able to provide your original purchase price, your proof of purchase, receipts, bank statements, credit card statements, whatever.

But let's be real. Most of us don't keep that paperwork, especially for personal items that we've sold at a loss.

It's a tricky situation. My advice would be to pull out a notebook and come up with some reasonable cost estimates. If push comes to shove, you can always show this to evidence your costs.

Let's go on Scenario Number 2: Incorrect 1099-K Forms

Another possibility is that you received a 1099K that was sent to you in error, meaning that you should never have received it for whatever reason.

Maybe it was something personal, or maybe it wasn't even for you.

Here's the official guidance from the IRS.

So what the IRS says to do with this is report the income from your incorrect Form 1099K on Schedule 1, Form 1040, Additional Income and Adjustments to Income. Then note the error as shown in this example.

So in this example, you receive Form 1099k which includes the $20,500 that your family sent you for college tuition and books.

Clearly, it's not taxable income. So how do you report this?

How Do You Report an Incorrect 1099K?

Okay, so similar to scenario number one.

We're looking at Schedule 1 (Form 1040) - Additional Income and Adjustments to Income. There's a Part I and there's a Part II. 

So on the same line as scenario 1 - Part I, Line 8z, you'll enter, "INCORRECT FORM 1099-K", and you're going to list the amount. In this example, it's $20,500, and this flows to Page 1 of Form 1040 as Income. 

And on Part II, Line 24z, you'll indicate on Other adjustments, "INCORRECT FORM 1099-K" Incorrect, indicate the amount $20,500 and this amount now flows also to Form 1040 Page 1 as a Reduction. So the net effect is zero. 

And that's it. This is the IRS's official guidance. it's pretty straightforward.

So let's move on to Scenario Number 3: Personal Sales With Profit

Imagine you sold some personal items on eBay and ended up making a profit. Picture something like Star Wars collectibles that have gone up in value. Suppose your total sales for the year were $4,000 and you got a 1099 for that amount. After crunching the numbers, you figure out your original cost was $2,500.

In this case, you're looking at a taxable gain of $1,500. Depending on the nature of the activity, it could either go on Schedule C, Profit or Loss From Business, or on Form 8949.

In this example, we'll assume there was no business activity and it was just personal sales, which would be reported on Form 8949.

Here's how the IRS would want you to show that on your tax return.

In this example, the items sold on eBay were purchased years ago for less than the selling price. Basically, you have a taxable gain. In this example, it's a personal transaction,

So it would be reported on Form 8949 as follows,

It's a long-term transaction, so Box F would be checked. In column A, you would indicate the Description of the Item Sold. In Columns B and C, you would indicate the Date Purchased and Date Sold. For this example, entering, "VARIOUS" might work as well. In Column D, you would indicate the proceeds. This should be the same amount reported to you from the 1099K, So we'll put $4,000 here. In Column E, you would enter your total cost which we said was calculated at $2,500. This is a taxable gain, so no codes are necessary in Column F or G. Therefore, Column H would be $1,500.

This number then flows to Schedule D, Capital Gains and Losses on Part II, Line 10, as shown in the screenshot below.

On second thought, you probably do want to enter the dates to show that this was a long-term gain.
It may or may not matter.

If you follow my instructions, I think it's pretty straightforward, but for some, maybe it's not really that straightforward. So if you need help, definitely seek out a tax pro.

That's about it.

You may encounter Incorrect 1099Ks being issued to you, and theoretically, the IRS says to go back to the issuer and ask them to correct it. But practically speaking, they probably won't do it. So just use the methods I covered to report it on your tax return. This way, you avoid a deficiency notice, and the IRS will probably leave you alone.

I hope you found this helpful.
As always, thanks for reading and see you in the next blog post.