You ask, what are my tax liabilities if I sell my car online or otherwise? You do not have to report vehicle sales on your tax return unless you sell a vehicle for more than its original purchase price. In all other instances, sold vehicles are considered capital losses because the seller does not make a profit.
Vehicles are Capital Assets
The only time a vehicle owner is liable to report income on a vehicle sale is when profit is made from the sale. For example, an old junk car with new parts installed that gets sold as a refurbished car for more than the original purchase price plus parts would be a taxable asset.
However, since vehicles are depreciating capital assets, there might still be no tax liability even if the car has had repairs done or accessories installed. Depreciation can and should be taken into consideration when determining whether the vehicle was sold for profit or at a loss.
Another instance when a vehicle owner is liable for paying taxes on a car sale is in the case of classic collectable cars, which generally appreciate in value over time.
Are There Tax Benefits to Trading Used Cars Instead of Selling?
In some states, new car buyers can enjoy tax benefits by trading in their old cars. Used car dealers frequently use this information in their sales pitches. In the states where these benefits apply, they work by reducing sales tax on the car being bought—not reducing capital asset tax on the car being sold.
Unscrupulous dealers often use vague language to blur the lines between these two types of tax benefits. A typical situation involves the dealer making a low-ball offer and then framing it as a great deal because the customer would lose a lot of money paying taxes on the car if sold privately.
Not only is that not true, it constitutes a violation of the customer’s trust and should be reported to the Federal Trade Commission. The FTC’s Bureau of Consumer Protection pursues and litigates against businesses that misrepresent tax code for their own benefit.