The IRS Has a Name for Those Bags and Shoes that Fashion Calls Gifts, "Income"

It is no coincidence that many-a-fashion-industry-insider is Instagramming Chloe’s “C” bag at the moment, or a Dior Saddle Bag or Louis Vuitton x Grace Coddington collab bag not too long ago, or before that a t-shirt bearing the new Peter Saville-designed Burberry logo, or the Chanel cap-toe sling backs, etc. “Nearly every brand sends gifts to editors,” Racked noted back in 2017. Look beyond traditional editors to influencers are the same can be said of the countless handbags and footwear that brands bestow upon influencers each seasonin an effort to induce spending by these followers of these highly-followed figures.

While gifting is an age-old practice in the fashion industry, one relativelynewfangled development – the advent and marked rise of the online resale economy – has put a twist on its workings, a development that has potential tax implications for gift-givers and gift-recipients, alike. 

The fashion industry has been rocked as a slew of big-name fashion figures have become the targets of routine tax evasion crackdowns by Italian financial policeover the past several years. Dolce & Gabbana founders Domenico Dolce and Stefano Gabbana, Prada’s chief executive officers Miuccia Prada and Patrizio Bertelli, Giorgio Armani, the Bulgari family, and former Valentino chairman Matteo Marzotto, among others, came under the Italian tax authority’s microscope for failing to pay up.  All the while, Gucci’s parent company Kering is currently in the midst of an investigation after allegedly dodging $1.6 billion in taxes

These are extreme cases, but what about the smaller instances of tax side-stepping that are happening with some regularity in fashion in connection with the incessant practice of gifting? In other words, what about the gifts that are accepted and then resold? 

There is a long history of editors off-loading the gifts and pocketing the profits. As the New York Post noted in 2003, editors and models, alike, were been lugging hordes of designer wares into upscale consignment stores in Manhattan and hawking them on eBay or other marketplace sites.

Nowadays, the practice is far more expansive than that. The rise of the resale economy and the ease with which products can be listed on e-commerce consignment sites has changed the game. What were once merely excess gifts – “like wrong sizes mindlessly sent over, or just the overflow of product in general that no one’s held accountable for,” per Racked –  have turned into potential sources of revenue for their recipients – sources of revenue with tax implications, that is. 

These otherwise innocuous gifts become a legal issue when they are resold, and the profits made from such sales must be taken into account in one way or another come April, when Americans file their individual income tax returns. 

At least one fashion industry insider, who has sold products that she received as gifts from brands, told TFL on the condition of anonymity that but for receiving professional tax advice, she would not have known to report money earned as a result of reselling gifted products. “They aregifts, after all,” she said. The Internal Revenue Service (“IRS”) has a different definition for these “gifts,” though. It classifies them as income. 

In accordance with the IRS’ taxable versus non-taxable income, “Generally, an amount included in your income is taxable unless it is specifically exempted by law.” One such exemption: Gifts ... of minimal value.” The government agency specifies this to include “flowers, fruit, books, etc., provided under special circumstances.” 

What is not exempt? Non-de mininis gifts, which is almost certainly where $1,500 Gucci jumpers, for example, or $3,300 Chanel bags, fall. 

As Forbes’ tax columnist Robert W. Wood states, “Income means income from allsources. If you sell unwanted clothes, cars, furniture, even family heirlooms, are they taxed? You bet. If you sell something for $100 you bought for $50, that’s a $50 gain.”

While the U.S. government passed legislation in 2011 requiring that payment settlement entities – such as eBay, Amazon, and most relevantly for fashion folks, The RealReal, Vestaire Collective, and other upscale consignment sites – file a new form, the Form 1099-K, that only impacts the sellers on their platforms who exceed $20,000 in gross sales and 200 transactions in a calendar year.

This means that, at least in theory, industry insiders who sell 200 products or less and that bring in a total of $20,000 or less in sales on those items, will not be on the receiving end of a 1099-k form from these sites and thereby, mightbe able to bypass – either intentionally or not – declaring such income on their annual tax return without any red flags from the IRS. 

Given the seeming lack of tax exemptions for fashion's certainly-not-de minimis gifts, those selling off their designer garments and accessories are accumulating money for items that they did not pay for in the first place, and thereby, are subjected to tax implications in connection with that income. 

With that in mind, this is one place where fashion could be sorely lacking in terms of adherence to the law, and an area that is worthy of some attention right about now.