Navigating Tax Implications of Reselling Tickets to Avoid IRS Scrutiny

Online sellers should tread carefully as the Internal Revenue Service intensifies its oversight of small businesses and side hustles this tax season. Many individuals may not fully grasp how changes in tax reporting requirements could impact their finances.

Starting in 2024, anyone earning over $5,000 from selling tickets, musical instruments, or various goods and services online will receive a 1099-K tax form. This marks a significant shift from the previous threshold of $20,000, which meant fewer people faced scrutiny regarding their online sales.

New reporting regulations mean payment platforms like PayPal, Square, and Venmo will report any transactions totaling $5,000 or more in one year, eliminating the previous transaction minimum. The rules further tighten in 2025, with the threshold dropping to $2,500 and finally narrowing to $600 in 2026.

Taxpayers should prepare for these changes, as millions will soon receive tax forms they never received before, ensuring they account accurately for their online earnings.

Understanding the IRS’s Intentions

Experts suggest that the IRS aims to clarify its position on part-time businesses operating through platforms such as eBay and Etsy. Lee Heisman, a partner at Exit Wealth Advisors in Atlanta, emphasizes the importance of adhering to tax laws surrounding these activities.

Initially, Congress intended to implement the $600 threshold in 2021 to enforce tax collection on gig work and reselling online; however, industry complaints led to a delay. As a result, the IRS phased in the new threshold over several years to allow platforms the time to adjust.

Tax Reporting and Compliance

It’s critical to note that taxpayers must report their earnings regardless of whether they receive a 1099-K. History shows a tendency among individuals to underreport income when no formal tax documents are provided. In my experience, while salaries from traditional employment are usually reported accurately, online income often goes unreported.

This year might be particularly pivotal for those who sold items such as handmade crafts, sports memorabilia, or season tickets as they could face unexplained tax liabilities for the first time. The IRS has already exhibited interest in taxpayers who fail to report online income, often subjecting them to steep penalties.

A Closer Look at IRS Investigations

The IRS has been actively investigating taxpayers who may not have reported income from online platforms, scrutinizing earnings from 2017 to 2020. This includes investigations against experts on various platforms like Just Answer—a site that connects customers with professionals such as veterinarians and mechanics.

In a significant case, a judge authorized the IRS to compel Just Answer to disclose names of users with revenue exceeding $5,000 in any given year during that period. Such actions emphasize the IRS’s commitment to scrutinizing this space.

For instance, one taxpayer audited in 2020 reported over $400,000 in unreported income accrued over four years of answering questions on the site. The IRS identified multiple users potentially evading tax responsibilities, spotlighting the growing scrutiny of online earnings.

Establishing Your Online Business Legitimately

Regardless of whether a seller receives a 1099-K, anyone generating meaningful revenue from online sales should treat their activity as a legitimate business. This remains true even if the total sales fall slightly below the new reporting threshold.

To maintain clarity between personal and business finances, it is advisable to establish legal entities such as LLCs, maintain separate bank accounts, and utilize designated credit cards solely for business expenses. This separation can simplify record-keeping and help in identifying legitimate business deductions.

Moreover, if an individual operates at a loss for more than three out of five years, the IRS might classify the venture as a hobby, which could lead to disallowance of business deductions moving forward. It is crucial to understand this distinction as it can have significant tax implications.

Being Proactive Amid Regulatory Changes

The evolving tax landscape highlights the need for awareness and preparation among casual sellers. Ignorance of the recent changes will not serve as a valid defense if audited. Those engaging in any form of trading collectibles, selling tickets, or managing side hustles should closely follow regulatory updates to avoid complications.

Everyone hopes to avoid an IRS audit, but being prepared can alleviate stress in case an audit occurs. Organizing financial records and ensuring verification of any taxable income can go a long way in ensuring compliance and peace of mind.

Understanding these regulations today means being ready for tomorrow’s financial responsibilities. Whether running a small online shop or simply clearing out an old collection, clarity around tax obligations is critical for maintaining compliance.