Before used car prices began to fall at the end of 2022, prices skyrocketed from the previous year. That means many Americans were able to sell their cars to break even or make a profit, even several years after they originally bought it. While this may have been a nice revenue boost (or path to improvement), it also creates a unique situation when it comes to tax filings.
In most situations, it’s rare to sell a car for more than what you paid for it. So paying taxes on the profits from those sales is not something most Americans have ever had to worry about. But, like all income, the money you earn from the sale of a car must be reported to the Internal Revenue Service (IRS). Since most people aren’t familiar with the situation, we wanted to give you some guidance on whether or not you need to report your sale on your tax return, and how to do so if you need to.
Disclaimer: The information in this article is for informational purposes only and is not intended to be used as individual tax advice. You can use this information as a guide to help you understand what you may need to do, but for real assistance with your tax preparation, consult a professional accountant.
Do you need to report the sale of a car on your taxes?
It is not always necessary to report the sale of a car to the IRS. In fact, it is quite rare that you do. We spoke to accountant Sherry Deal for this article, who told us that the only time you’d need to report a car sale on your tax return is if you made a profit.
Outside of certain circumstances, like the explosion in used car prices in 2021 and 2022, or in the collector car market, that’s pretty rare. The value of most cars depreciates, usually immediately after you buy them.
Why more people will need to report a car sale on their 2022 tax return
It is true that cars tend to lose value under normal circumstances. But the past two years have been anything but normal for car stocks and the auto industry in general.
According to the US Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) data, used car prices have increased slowly over time as a general trend, even accounting for the historical fluctuations. In the 20 years between March 2001 and March 2021, the CPI actually diminished by 4.8%. Then, in the year between March 2021 and March 2022, the CPI for used cars rose 35.4%.
That means that, in gross value terms, a car purchased for $20,000 in March 2021 would have been worth $27,080 a year later. While that doesn’t take into account the money that would have been spent on maintenance, repairs and other expenses, the rapid rise in price was a rare opportunity for car owners to earn, rather than lose, money on the purchase of a car.
The CPI for used cars continued to rise in 2022 before peaking in June, when prices began to decline. This was followed by a rapid decline in the price of used cars in late 2022 and into 2023.
But even if the owners didn’t sell their car at full value, there was still that potential for some profit. And with that profit, came the need to report that income to the IRS.
Why you need to report the proceeds from the sale of a car to the IRS
Simply put, any and all income must be reported to the IRS on your tax return. That’s true whether it’s income from a salary, a odd job, or selling something at a profit. The latter is what is known as surplus value. This simply means that you have earned financial capital, also known as money, and that is included in your annual income.
How to report the proceeds from the sale of a car on your taxes
If you sold a car at a profit in 2022, paying taxes on those profits could be a bit of a pain, but reporting your income isn’t especially difficult. If you ever reported other capital gains on your return, the process is no different for reporting income from the sale of your car.
Report Earnings from the Sale of a Car on Your Tax Return: Tutorial
Deal gave us a step-by-step guide to reporting the proceeds from the sale of a car on your tax return so we can share it with Automoblog readers. This is what she says you should do:
- Determine the original purchase price. If you don’t remember, check the bill of sale or purchase contract.
- Subtract all taxes associated with the purchase. Depending on your state, this may include sales tax, use tax, and/or wheel tax.
- Add any vehicle upgrade costs to the adjusted purchase price. This does not include regular maintenance costs, only improvements. Anything that is long-term, like new paint or new stereo speakers, is considered an upgrade.
- Subtract the value the car sold for from the adjusted purchase price. So if you bought the car for $14,000 and sold it for $8,000, you would have a capital loss of $6,000. You would not have to report this to the IRS. However, if you bought it for $14,000 and sold it for $15,000, making a capital gain of $1,000, you must report it on your tax return, using Schedule D on Form 1040, which is appropriately titled “Capital Gains and Losses.” . The form will tell you the necessary information.
What if I sold a car for profit in 2021 and didn’t report it?
If you didn’t report income from a car you sold for a profit in 2021, don’t worry. You still have time to correct your filing to get it right with the IRS.
As with any other error on your taxes, correcting this requires you to file an amended return. To do this, you’ll need to use form 1040-X for 2021. Just as you would for a standard return, use a Schedule D form to correctly report your gain as capital gains.
You will likely owe some taxes after you amend your 2021 return, especially if you made a significant profit. Since you are technically paying your taxes late, you may also have to pay penalties on top of what you owe.
In some cases, you can apply for relief, but this can get complicated. If you think you may qualify for relief, it’s best to work with an accountant. In fact, unless you are confident in filing your taxes in general, a good accountant is almost always worth the money you pay.
Paying Tax on the Sale of a Car: Final Thoughts
In short, you only need to report a car sale and pay tax if you have made a profit. If you were able to sell a car in 2022 for more than you paid for it, you’ll need to report that income as a capital gain using the Schedule D portion of Form 1040. While that’s typically rare, the rapid rise in car prices used cars between 2021 and 2022 means that some people may need to report their sales earnings when they file their 2022 tax return this year.
If you made money from a car sold in 2021 and you did not report the income from that sale, you will need to file an amendment to your 2021 tax return to report it correctly.
With used car prices falling rapidly and negative net worth on the rise, this is much less likely to be an issue when it comes to filing your 2023 tax returns. Nonetheless, it’s always a good idea to keep records. details of any major transactions you make to help you when it’s time to file your taxes.
