Do you pay tax when you sell a car?

The vast majority of people who sell their vehicles, do so at a price that is lower than what they paid for them. This is because cars (especially new cars) are depreciating assets whose value decreases with use and with the passage of time.

The good news is that if you did not make a profit on the sale of your vehicle, you are not subject to any taxes!

Nevertheless, you should keep a record of the bill of sale from when you bought and sold the vehicle. This is important in case you are audited.

Vehicles sometimes do appreciate in value. This happens with classic and collector cars and it can also happen when there is a scarcity of used cars, say, during a global pandemic.

In such rare situations, you might sell your car for more than your cost basis (the amount you paid for it plus shipping costs and the cost of any improvements you've made to it—more on this below). Since you have made a profit, this is called a capital gain and the Federal law requires you to report it as part of your taxable income.

In that case, you will need to report it on your yearly income tax return using form 1040 Schedule D (Capital Gains and Losses). Again, it is crucial to have a record of all your Bills of Sale.

You may think it's probably fine not to report your capital gain. Be aware that this is against the law and can put you at risk if audited.

It's important to be honest and accurate in your tax reporting. If you don't report a capital gain, you might not get caught immediately. But if the IRS audits you later, you may face penalties. These can include fines and interest charges. In serious cases, it can even result in criminal charges!

If you added a better stereo system or a roof rack to the vehicle—anything that increases its value or extends its lifetime—you can deduct that cost from the profit you made when calculating your capital gain. For example, if you bought a car for $5000 and spent $2000 improving it, then sold it for $10,000, your capital gain is $10,000 - $5000 - $2000 = $3000.

Note that this does not include routine maintenance and upkeep of the vehicle. You also cannot factor in any labor you yourself performed on the vehicle.

Yet again, make sure you keep all the receipts for any improvements.

No. The IRS does not allow you to deduct losses from the sale of personal-use property.

That is, not unless you were selling the car as property of your business—in which case, probably best to talk to your accountant.

In most states, there is a tax on purchases of used vehicles and that is collected when the buyer registers the vehicle with the DMV. As a seller, you should not feel obligated to cover this cost for your buyer.

• If you did not make a profit on the sale of your vehicle, there is no need to pay any taxes.

• If you made a profit, you must report it on your yearly tax return. This profit is a capital gain and counts as taxable income.

• If you made any upgrades or improvements to the vehicle, you can deduct them from the capital gain.

• Documentation and record-keeping are key! Keep your receipts! Make a Google Drive folder and store images of all bills of sale, shipping costs, and improvement invoices. Without these you will have difficulty proving anything.