The IRS requires all taxpayers to report income, regardless of how they earned it and how much they earned. How you report the income depends on whether the sale constitutes a business or is just part of a hobby. Income from hobbies is reported on Form 1040 and business income is reported on Schedule C.
Who Has to File a Return
If you file a tax return, you must report all of your income. Not all taxpayers, however, have to file a tax return. If your overall income was low enough, or if you can be claimed as a dependent by someone else, you may not need to file at all. Use the IRS online application to determine if you need to file a tax return.
Penalties for Not Reporting Income
If you do file a tax return and don't report all of your income, you could face fines and penalties. While the IRS won't likely know if you sold scrap metal for profit, scrap metal processors usually keep records of who sells them scrap metal. This means that if a scrap metal shop is audited, the IRS could trace transactions back to you, the seller.
If you accidentally fail to report the income and the IRS catches it, you'll have to pay the tax, plus a 20 percent penalty and accrued interest charges. If the IRS believes that you purposefully left the income off your return when you knew you should have reported it, you could be charged with tax fraud. Fraud is punishable with prison time or a minimum $250,000 fine.
Business vs. Hobby
The way you report income from the sale of scrap metal depends on whether you have a hobby or a business. According to the IRS, you have a business if you have an expectation to earn a profit. You probably have a business if you regularly buy and resell scrap metal at a profit, put time and effort into growing your business, and partially or fully depend on the income from selling scrap metal. On the other hand, if selling the scrap metal is a sporadic activity, the sale can probably be considered hobby income. For example, if you were restoring an old car as a hobby and sold some excess scrap metal to defray your costs, that's hobby income.
Report proceeds from hobby income on line 21, labeled Other Income, on Form 1040. If you incurred any costs to sell the scrap metal, you can write those off as itemized deductions on Schedule A. Potential costs you could write off would be the original price you paid for the metal and the cost of transporting it to the buyer. Keep in mind, though, that hobby deductions cannot exceed hobby income. For example, if you purchased the scrap metal for $100 but sold it for $75, you can only write off $75 worth of hobby deductions.
Report proceeds from business income in Part 1 of Schedule C. You can deduct the original cost of the scrap metal as cost of goods sold on line 4. If you had any other business expenses, report them in Part 2. Common business expenses you can deduct are state and local taxes, licenses, mileage expense, professional fees, insurance and office supplies.
You can deduct business expenses in excess of business income and use the loss to offset income from other sources. If you do this for multiple years, however, the IRS may reclassify your business as a hobby.