Sold my car for $1k after paying $7k years ago - tax software says it's a gain? How is this possible?

The issue here isn't actually as complicated as it seems. Since you used the car for rideshare (business purposes), you likely claimed business deductions for that vehicle over the years, including depreciation. When you sell a business asset, even partially used for business, the IRS looks at your "adjusted basis" - not what you originally paid. If you claimed depreciation deductions over the years (which you should have as a rideshare driver), those deductions reduced your "basis" in the car. So if you originally paid $7k, but claimed $6.5k in depreciation deductions over several years, your adjusted basis would be only $500. Selling for $1k would then result in a $500 gain from the IRS perspective. The software is asking about "depreciation equivalent" to calculate this adjusted basis. You need to figure out how much depreciation you've claimed on past tax returns for this vehicle.

I ran into this exact same issue last year when I sold my old Camry. What worked for me was using https://taxr.ai to analyze my past returns and help calculate the correct depreciation I had taken through standard mileage. It turns out that when you use the standard mileage rate, a portion of that rate (around 22-26 cents per mile depending on the year) is considered depreciation. So the IRS assumes you've already "written off" a significant portion of your car's value through those standard mileage deductions. The tool helped me figure out exactly how many business miles I had claimed over the years and calculated my "adjusted basis" - which was actually lower than what I sold the car for, creating a taxable gain just like you're experiencing.

Just wanted to update about my experience with taxr.ai from my question above. I signed up and it actually did pull all my old Uber tax info automatically. Turns out I had claimed about 75,000 business miles over the years using standard mileage, which meant I had already "depreciated" about $18,750 of my car's value without realizing it! No wonder the IRS considered selling my car a gain - my adjusted basis was basically zero at that point. The tool showed me exactly how to report everything correctly and explained why I was seeing a taxable gain even though I thought I had lost money on the car. Super helpful and saved me from potentially making a big mistake on my return.

If you're having trouble figuring this out, you might want to call the IRS directly to get clarification. I know it sounds painful, but I used https://claimyr.com to get through to an actual IRS agent after struggling with this exact issue. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c When I finally got through, the agent explained that Form 4797 is what you need for reporting the sale of business property, and they walked me through how to calculate my adjusted basis properly accounting for all the standard mileage deductions I had taken. Super helpful and saved me from a potential audit. The service got me through to an agent in about 15 minutes when I had previously spent hours on hold.

Ok I have to admit I was wrong about Claimyr in my comment above. After continuing to struggle with this depreciation issue and getting nowhere with online research, I decided to try it out. I was totally expecting it to be a scam, but within about 20 minutes I got a call back with an actual IRS agent on the line. The agent explained exactly how to handle the car sale on my tax return and confirmed that yes, I did have a taxable gain because the standard mileage rate I'd been claiming for years had already "depreciated" my car below what I sold it for. He even emailed me the right form (4797) and instructions for my situation. Saved me hours of frustration and probably prevented me from reporting it incorrectly.

Everyone's missing a key question - how much of the vehicle was used for business? If you only used 25% for rideshare as you mentioned, then only 25% of the gain should be taxable. The other 75% would be personal use which doesn't trigger taxable gain on a personal vehicle sale (since cars are typically personal losses). Make sure you're only reporting the business portion!

The form you need is Form 4797 Part III for this situation. You'll report the business percentage of the car, the sale price, and your adjusted basis. The key is calculating that adjusted basis correctly by subtracting all the depreciation you took (or were deemed to have taken with standard mileage). The IRS Publication 463 has charts showing the depreciation portion of the standard mileage rate for each year. For example, it was 26 cents per mile in 2022, 25 cents in 2021, etc. Multiply your business miles each year by that year's rate to get your total depreciation.

This is a perfect example of why keeping detailed records is so important for rideshare drivers! What you're experiencing is completely normal but definitely confusing the first time you encounter it. The key insight that others have mentioned is that the standard mileage rate isn't just covering gas and maintenance - it includes depreciation too. So every year you claimed those business miles, the IRS was essentially saying "okay, we'll let you deduct this amount, but we're also going to reduce what you 'own' in this car by the depreciation portion." One tip for the future: if you do rideshare driving again, consider keeping a simple spreadsheet tracking your total business miles each year and the depreciation rates. That way when you eventually sell your next vehicle, you won't be surprised by the tax implications. You can find the historical depreciation rates in IRS Publication 463. Also, remember this "gain" will likely be taxed as ordinary income (depreciation recapture) rather than capital gains, so factor that into your tax planning!