Does Selling Your Car Count as Income?
Selling a car? Get clear answers on whether it's taxable income. Understand the tax implications of car sales and avoid surprises.
When selling a personal vehicle, many people wonder if the money received counts as taxable income. For tax purposes, the entire sale price of a car is not considered income. Instead, only the financial gain realized from the sale is subject to taxation. This means that for the majority of individuals selling a personal car, the transaction will not result in taxable income.
Understanding Gain or Loss
When an asset is sold, income or loss is determined by comparing the selling price to the asset’s “adjusted basis.” A capital gain occurs when the selling price exceeds this adjusted basis, while a capital loss arises if the selling price is less than the adjusted basis. For personal use property, any capital gain is taxable and must be reported to the Internal Revenue Service (IRS). Conversely, a capital loss from the sale of personal use property, like your car, cannot be deducted from your taxes.
For example, if you purchased a car for $20,000 and later sold it for $22,000, you would realize a $2,000 capital gain, which is generally taxable. However, if you bought the same car for $20,000 and sold it for $15,000, you would have a $5,000 capital loss. This loss is not deductible and does not need to be reported. Different tax rules apply if a car is primarily used for business purposes.
Calculating Your Car’s Basis
Establishing your car’s “adjusted basis” helps determine any taxable gain or loss from its sale. For personal use vehicles, the initial basis is the original purchase price. This includes the amount you paid for the vehicle in cash, through debt, and any sales tax or other direct purchase expenses.
The basis can be increased by the cost of significant improvements that add value, prolong useful life, or adapt the car to new uses. Examples include a new engine installation or major modifications. Routine maintenance, standard repairs, or insurance costs do not increase a car’s basis. For most personal cars, the adjusted basis remains the original purchase price because significant, value-adding improvements are uncommon.
How to Report the Sale
If you experience a taxable gain from selling your car, you must report this transaction to the IRS. This is done using IRS Form 8949, “Sales and Other Dispositions of Capital Assets.” On Form 8949, you will provide details about the sale, including the acquisition date, sale date, sales price, and your calculated cost or basis.
After completing Form 8949, the totals are summarized on Schedule D (Form 1040), “Capital Gains and Losses.” Schedule D is used to calculate your overall capital gain or loss for the tax year, which then flows to your main tax return, Form 1040. If you sold your car for less than or equal to your adjusted basis, meaning there is no taxable gain, you generally do not need to report the sale to the IRS.