If I receive goods as a form of compensation, can I sell those goods without being double taxed on them?

Question

I recently got invited to participate in a program which sends people consumer products free-of-charge in exchange for a detailed, unbiased review of the products in question.

When enrolling in the program I was told that if I receive over $600 worth of goods over the course of the year I will receive a 1099-NEC form and be required to pay taxes on those goods. This has me worried that if I receive too many items that I don't have a good personal use for I'll end up losing money on this venture.

When thinking of possible ways to offset that loss, one thing I considered was selling any goods I don't plan to use myself after I finish the review. However, as I understand it the sale of any such goods would be a taxable event, leading to a situation where I'd be taxed twice on the same goods; once for receiving them and once for selling them. (E-Bay, for example, says they are required to issue a 1099-K for any goods in excess of $600 sold there.)

Is there a way to avoid being double-taxed in this way? (Note that my cost basis for the goods is $0 since I am receiving them for free.)

Answer 1

The tax which may apply when you sell property is capital gains tax, which applies to the amount you receive from the sale above the asset's "basis" value:

When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset's basis is its cost to the owner, but if you received the asset as a gift or inheritance, refer to Publication 551, Basis of Assets for information about your basis.

In the question, the goods were acquired at no cost to the owner, but fall within another exception in Publication 551 ("Property Received for Services"):

If you receive property for services, include the property's FMV [fair market value] in income. The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.

So, there is no capital gains tax unless you sell the goods for more than the amount declared on the 1099-NEC form.

Answer 2

There's a fundamental discrepancy here.

When you receive your 1099 NEC this will include a statement of the payment you receive, i.e. the value of the goods. You will be taxed on that value.

If and when you sell the goods the amount you "paid" for them will be that value. For example of the item is valued at $1000 on the 1099 NEC then you paid for them by giving $1000 worth of services (in the eyes of the person giving you the item).

On selling them you only have to pay tax on the profit you make over the value on the 1099 NEC.

Answer 3

When enrolling in the program I was told that if I receive over $600 worth of goods over the course of the year I will receive a 1099-NEC form and be required to pay taxes on those goods.

What you should have been told is that if you receive $600 or more they will send you and the IRS a 1099-NEC, but even if the amount of goods you receive is under $600 you are still responsible for reporting it on your tax forms.

Because you accepted those items as compensation, you have to include them in your tax calculations.

The value of those items is not $0. So if you turn some of them into cash, that will make it easier to pay that tax bill, you will not have to count the money you get from selling them as income unless you are able to sell them for more than their original value.

When thinking of possible ways to offset that loss, one thing I considered was selling any goods I don't plan to use myself after I finish the review. However, as I understand it the sale of any such goods would be a taxable event, leading to a situation where I'd be taxed twice on the same goods; once for receiving them and once for selling them. (E-Bay, for example, says they are required to issue a 1099-K for any goods in excess of $600 sold there.)

You would use the documentation from the first company to reduce the impact of the 1099 from E-BAY. That 1099 from E-bay would also be sent to the IRS and to you, therefore the IRS would expect to see it reflected in your tax forms.

E-bay has no idea how much you paid for the items. they are just reporting their transactions to the IRS so they don't have to pay taxes on the full value of the transaction.