Various social media posts circulating in late December 2021 claimed that thanks to the coronavirus stimulus legislation known as the US bailout, the administration of US President Joe Biden and Democratic lawmakers would start to “spy” on or to “snoop” on users of payment applications like PayPal and Venmo. Here is an example of one of these messages:
The truth is, unsurprisingly, more nuanced, but the bottom line is that, contrary to what the above posts on Twitter say, the effect of the legislation in question is not that the Biden administration or the Democrats. “Exploit” or “spy on” bank accounts or treasury applications. This is a misleading characterization.
The legislation drastically lowers the threshold for reporting taxable transactions made using cash apps such as Venmo, PayPal, or Zelle for goods and services to the IRS. And when you hit that threshold, app companies will then be required to send a tax form called 1099-K to you and the IRS.
A 1099-K is, according to PayPal, an “informational tax form that is used to report payments for goods and services received by a business or individual during the calendar year.”
At the time of this writing, the current threshold for such a declaration is $ 20,000 and 200 payments for goods and services. As of January 1, 2022, this reporting threshold will drop to $ 600.
This could have a significant impact on the tax returns of platform users. Here’s how Bloomberg Tax described how users might feel the change:
For example, a model train collector may have paid $ 5,000 for model train parts over several years that he now sells for $ 8,000, and the market that the seller introduced to the buyer and through from which the sale took place may charge the seller a total fee of $ 800. It can cost the model train seller $ 200 in postage to send the parts to their buyers. The Form 1099-K that the vendor receives from TPSO will yield $ 8,000 in gross proceeds paid. However, the vendor’s taxable gain from this sale would only be $ 2,000. As a result, collectors and other online sellers will need to keep detailed records of their expenses in the future to avoid over-filing income and overpaying taxes.
Also consider the alternative: a teenager who walks dogs to earn extra money. If their income in 2022 exceeds $ 600, their spending may be limited to fees charged by the website that connects them to pet owners, but they will have to pay income tax – and possibly self-employment tax – on the income they have. ‘they win.
According to PayPal, owner of Venmo, the change does not affect people who use the apps for personal transactions, like reimbursing a friend for your share of dinner, gifts, or going on trips. PayPal also states that its app allows users to classify their own transactions as personal in relation to payment for “goods and services.”
âBusiness users of Cash applications will start receiving tax forms. Here is what you need to know. WJHL | Tri-Cities News & Weather, October 14, 2021, https://www.wjhl.com/news/business-users-on-cash-apps-to-begin-recipient-tax-forms-what-you-need- at know/.
Pflieger, Deborah. âNew Form 1099 Reporting Coming in 2022â, Bloomberg Tax, December 15, 2021, https://news.bloombergtax.com/tax-insights-and-commentary/new-form-1099-reporting-coming-in-2022.
âNew US Tax Reporting Requirements: Your Questions Answered. PayPal Newsroom, November 4, 2021, https://newsroom.paypal-corp.com/2021-11-04-New-US-Tax-Reporting-Requirements-Your-Questions-Answered.
âPayPal and Venmo Taxes: What You Need to Know About P2P Platformsâ. TurboTax, November 27, 2021, https://turbotax.intuit.com/tax-tips/self-employment-taxes/paypal-and-venmo-taxes-what-you-need-to-know-about-p2p-platforms / L5DNjOUM1.