If you are a U.S. citizen and earn money from the sale of goods or services, the IRS considers it taxable income it doesn’t matter how or where you get paid. But some sellers have tried to fly under the federal government’s radar by accepting payments through an online app, like PayPal or Venmo, and then not reporting them on their tax return.
This year, however, the IRS will have a clearer picture of the income people have collected online. Indeed, payment apps, online marketplaces and on-demand economy companies such as Airbnb are now required to declare even relatively small sums that users receive for the sale of goods or services.
Previously, companies had to submit reports only for users who made at least 200 transactions and at least $20,000 in revenue in a given year. Effective January 1, the new threshold is one or more transactions that collectively generate at least $600 in revenue.
Some users have just learned of the change in law because they received a notice from payment platforms asking them to confirm their tax information, including their legal name, address and social security number. The platforms need this information to ensure that the earnings they report for, for example, Mary Smith are attributed to the correct Mary Smith.
Here’s a breakdown of the new rule and what it means for your 2022 tax returns. payment.)
The change was hidden in the US rescue plan, the Biden administration’s $1.9 trillion COVID-19 relief bill. Best known for its stimulus checks, expanded child tax credits and extended unemployment benefits, the bill was financed mainly with borrowed money. But he also sought to improve tax compliance by lowering the threshold for reporting income to $600 in “third-party settlement organizations.” The change affects companies such as PayPal, eBay, Etsy and Airbnb. Zelle, a system that transfers money between banks, says it’s is not considered a third-party settlement organization.
To be clear, there is nothing new about having to pay taxes on sales or service income. As the IRS explains in Post 525, the obligation even extends to profits from the sale of personal items or collectibles. So if you buy a rare jazz record for $5 at a yard sale and then sell it for $300, you owe taxes on the $295 you cleared. The catch is that you can’t deduct losses on those sales, so if you paid $300 for the LP and then sold it for $5, you can’t write off the $295 you have lost.
The difference now is that PayPal, Airbnb, and other third-party settlement organizations will send far more Form 1099-Ks to the IRS and their clients. Forms for 2022 are due out in January 2023.
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However, the new reporting requirement will not necessarily deter tax evaders and could cause problems for casual users of these platforms.
One problem is that 1099-Ks report your income, not your profit. And only the profit (or capital gain) is taxable. So if you sell used furniture on eBay for $800, you’ll get a 1099-K indicating that you received $800, even if the furniture costs you way more than that.
Similarly, payment apps only know how much you’re paid and by whom, not how much (if any) of the income is taxable. So if you sell your used furniture through Facebook and accept payment through PayPal or Venmo, you may very well get a 1099-K.
And if you cross the $600 threshold at Airbnb, you’ll get a 1099-K even though the income isn’t taxable if you rent out your home. less than 15 days per year.
To reduce the number of unnecessary 1099-Ks, some payment apps ignore transactions made on personal accounts and focus exclusively on business users.
Cash App, for example, tweeted on February 4, it will send 1099s only to users enrolled in its Cash App for Business program. “An everyday activity, like sending money to a friend for dinner or asking for money for concert tickets, is not something you’ll get a 1099 for,” the company said.
As a result, however, sales of goods and services to personal accounts that should be taxable will not be reported by some of these apps.
Venmo goes one step further to try to identify potentially taxable transactions. Any sale, whether from a business or personal account, will count toward the $600 threshold if the buyer selects “purchase protection“, an optional guarantee against fraud.
Again, the proceeds of sale are not profit, and only profits are supposed to be taxed. So while sellers are supposed to include money reported on 1099-K forms in their gross income, they must use other forms to deduct the cost of the goods they sold (keeping in mind that you are not allowed to claim losses from the sale of personal items).
This is not a problem for businesses, which keep track of their costs and can deduct them easily on their tax returns. But it’s more of a challenge for consumers who use online marketplaces to unload goods or collectibles that are years old.
“The new 1099-K report is going to cause questions and confusion for taxpayers who haven’t received them before,” said Kathy Pickering, tax director at H&R Block’s Tax Institute. “So in situations where someone is unsure, we always recommend that you consult a tax professional about your specific situation.”
You might be tempted to ignore 1099-Ks you receive for unprofitable sales of personal items. But the IRS won’t ignore them. Pickering therefore suggested filing a Form 8949 to show that the 1099-K amounts produced no taxable gain.
It’s always a good idea to have receipts on hand, if the IRS tags you for an audit. So start putting together a paper trail of your most valuable personal assets, just in case you dump them in a way that generates a 1099-K.