I do I.T. and sometimes a client will want to upgrade or buy a new computer even when their old one is decent.

Suppose they give me a computer that they paid $1000 for, and the FMV is around $400 at the time. Then I turn around and sell that to another customer for the FMV, about $400.

Do I need to count the cost basis as $0, making it profit, or can I count the cost basis as $400 making it a wash? Thank you

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    Tax questions require a country tag. – Chris W. Rea Apr 18 '18 at 16:21
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    Either it's income for you when you receive it [because you claim it is something of value received as part of your business], or it's income when you sell it, or both [up to a total of the full value of what you sell it for]. No escaping the net result. – Grade 'Eh' Bacon Apr 18 '18 at 20:21
  • Whether you give the original client a discount on their new computer is probably important. – TripeHound Apr 19 '18 at 7:58

Trace the transaction.

At the start you had no computer and no cash; and in the end you had no computer and $400. Therefore the gain is $400...

Unless you gave them a price break on the service - in other words a barter. Then it would depend on the value of the credit you gave them. But the credit was part of your income for the original transaction.

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  • I tend to agree here. But, if Eddie's sister gave him a $400 computer she didn't want, and he sold it for $400 (of course), would the answer change? – JTP - Apologise to Monica Apr 18 '18 at 15:11
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    did his sister give it to him or to the business? The question is about a client who Eddie does work for. – mhoran_psprep Apr 18 '18 at 15:13
  • She gives the PC to her brother. When he sells it, it's thru the same method he sells PCs for his business. – JTP - Apologise to Monica Apr 18 '18 at 15:15
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    That is a discussion between him and his accountant/tax advisor. The safe thing would be to treat it as a business transaction. – mhoran_psprep Apr 18 '18 at 15:23
  • Ok What if it is my own old personal computer that I then sell to a client for my business? Can I count that as a "cost of goods sold" for my business as the FMV of the computer? What documentation would I need? Thanks again – Eddie Apr 18 '18 at 16:20

You can claim the cost basis is $0, and pay tax on $400 profit. Or you can claim the cost basis is $400, pay tax on $0 profit, and on $400 income. Either way, you pay tax on $400. Which is right because you are $400 better off.

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  • Although, in US, if you (somehow) received it with basis 0 and sold for more, that's a capital gain subject only to income tax and if long-term at lower rates, while if you received it in return for goods or services it adds to self-employment income, marginally subject to full income tax AND self-employment tax. – dave_thompson_085 Apr 20 '18 at 20:27

The whole idea of a "cost basis" is basically that it's money that you've already paid taxes for. For instance suppose you work at a job and get $1000, and you use that money to buy stocks, and several years later the stocks are worth $1500. You already paid income tax when you made the $1000 at your job. So when you sell the stock, you only have to pay taxes on the extra $500.

In this case, you haven't paid taxes on any of the money, so there's no apparent reason for there to be a cost basis. There could be one, however, if there are other facts. For instance:

If you claim that the computer was a gift, then the client would have to deal with the tax implications of that, while you would get the FMV at the time of gifting as cost basis. It would be difficult to claim that your client giving you stuff isn't in consideration for your services, however, and it's unlikely that they would want to deal with treating it as a gift.

Also, if you declare the computer as income in one tax year, and sell it in another, the FMV when you got it would be taxable income, and then you could claim that as a cost basis in a later year when you sell it.

Then there are further situations, such as depreciation, etc. However, without any further information, there's no reason to think that cost basis is relevant.

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  • I don't think you're right about gifts; pub 551 says they get either FMV or donor's adjusted basis, basically whichever is worse for you. But I agree this situation would be hard to treat as a gift. – dave_thompson_085 Apr 20 '18 at 20:29

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