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In the states, the issue is usually not with the IRS. You do not pay income tax when you sell a car for less then you paid for it. The issue is with the state government and the tax is based on the value.
From our DMV in Maryland.
An MVA “Bill of Sale”
A notarized MVA “Bill of Sale” is needed if the sale price is less than the vehicle’s book value and the vehicle is 7 years old or newer. Please call the MVA’s Customer Service Center at 1-800-950-1MVA (1682) to verify the vehicle’s book value.
If a notarized “Bill of Sale” is not presented and the purchase price of the vehicle is within $500 of the retail value as shown in the National Publication of Used Car Values, MVA will accept the purchase price as completed on the title.
An excise tax will be charged on the basis of 6% of the vehicle’s book value or 6% of the purchase price on the notarized “Bill of Sale” for vehicles 7 years old or newer. For older vehicles, the tax is calculated on the purchase price. Maryland’s minimum excise tax charged is $38.40, based on a minimum value of $640.
Read that again, carefully. Namely this portion. ' or 6% of the purchase price on the notarized “Bill of Sale” for vehicles 7 years old or newer '
Basicly you could still sell it for $1 and pay tax on just that dollar but you will need the extra step of getting a notarized bill of sale plus the title. Otherwise just the title will serve as sufficient evidence of sale price.
In the case of this particualr vehicle it would fall under this portion, 'For older vehicles, the tax is calculated on the purchase price. ' Which has a minimum of $38.40 tax for $0 to $640 sale price.