Before used car prices began to fall at the end of 2022, prices skyrocketed over the previous year. That means that many Americans were able to sell their cars at break-even totals or make a profit – even several years after buying it originally. While this may have been a nice income boost (or a path to an upgrade), it also creates a unique situation when it comes to tax returns.
In most situations, it’s rare to sell a car for more than you paid for it. So, paying taxes on the gains from those sales is not something most Americans have ever had to worry about. But, like all income, money you earn from selling a car needs to be reported to the Internal Revenue Service (IRS). Since most people are unfamiliar with the situation, we wanted to provide a guide on whether or not you need to report your sale on your tax return, and how to do it if you do.
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 a Car Sale on Your Taxes?
You don’t always need to report a car sale to the IRS. In fact, it’s fairly rare that you would. We spoke to accountant Sherry Deal for this article, who told us that the only time you’d need to report selling a car on your tax return is if you’ve made a profit.
Outside of select circumstances, such as the explosion of used car prices in 2021 and 2022, or in the collectible car market, that’s pretty rare. Most cars depreciate in value – usually immediately after purchasing them.
Why More People Will Need to Report a Car Sale on Their 2022 Tax Return
It’s true that cars usually depreciate in value under normal circumstances. But the last two years have been anything but normal for car values and the auto industry at large.
According to Consumer Price Index (CPI) data from the U.S. Bureau of Labor Statistics (BLS), used car prices have slowly increased over time as a general trend, even allowing for historical fluctuations. In the 20 years between March 2001 and March 2021, the CPI actually decreased by 4.8%. Then, in the year between March 2021 and March 2022, the used car CPI jumped by 35.4%.
That means that, in terms of raw value, a car purchased for $20,000 in March 2021 would have been worth $27,080 a year later. While that doesn’t account for money that would have been spent on maintenance, repairs, and other expenses, the rapid increase in price was a rare opportunity for car owners to make – rather than lose – money on a car purchase.
The used car CPI continued to climb in 2022 before reaching its peak in June, when prices began to come back down. This was followed by a rapid decrease in the price of used cars late in 2022 and into 2023.
But even if owners didn’t sell their car at peak 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 Profit From a Car Sale to the IRS
Quite simply, any and all income must be reported to the IRS on your tax return. That’s true whether it’s income from a salary, an odd job, or selling something at a profit. The latter is what’s known as a capital gain. This simply means that you have gained financial capital – also known as money – and that is included in your annual income.
How to Report Profit From a Car Sale on Your Taxes
If you did sell a car at profit in 2022, paying taxes on that profit might be a little painful, but reporting your income isn’t especially difficult. If you’ve ever reported other capital gains on your return, the process is no different for reporting income from selling your car.
Reporting Profit From a Car Sale on Your Tax Return: Walkthrough
Deal provided us with a step-by-step guide to reporting a car sale profit on your tax return so that we could share it with Automoblog readers. Here’s what she says you need to do:
- Determine the original purchase price. If you don’t recall, 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 improvement costs to the adjusted purchase price. This does not include regular maintenance costs, only improvements. An improvement is deemed as anything that’s long term, such as new paint or new stereo speakers.
- Subtract what you sold the car 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, earning a $1,000 capital gain, you would report this on your tax return, using Schedule D on Form 1040, which is appropriately titled “Capital Gains and Losses.” The form will instruct you on needed information.
What If I Sold a Car For Profit in 2021 and Didn’t Report It?
If you failed to 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 right with the IRS.
As with any other mistake on your taxes, correcting this requires you to file an amended return. To do this, you’ll need to use the 1040-X Form for 2021. Just as you would for a standard return, use a Schedule D form to correctly report your profit as capital gains.
You will likely owe some tax 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 penalty 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 about filing your taxes in general, a good accountant is almost always worth the money you pay them.
Paying Taxes on a Car Sale: Final Thoughts
In short, you only need to report the sale of a car and pay taxes on it if you’ve 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 part of Form 1040. While that is typically rare, the rapid increase in the price of used cars between 2021 and 2022 means that some people may need to report their sales profits when they file their 2022 tax return this year.
If you made money on a car sold in 2021 and failed to report the income from that sale, you’ll need to file an amendment to your 2021 tax return to report it properly.
With used car prices falling rapidly and negative equity 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 detailed records of any major transaction you make to help when it comes time to file your taxes.