If you're a U.S. citizen making money from the sale of goods or services, the IRS considers it taxable income regardless of how or where you're paid. But some sellers have tried to fly under the feds' radar by taking payments through an online app, such as Paypal or Venmo, then not reporting them on their tax return.
This year, however, the IRS will have a clearer picture of the revenue that people have been collecting online. That's because payment apps, online marketplaces and gig-economy companies such as Airbnb are now required to report even relatively modest amounts that users collect for the sale of goods or services.
Previously, the companies had to submit reports only for users with at least 200 transactions and at least $20,000 in revenue in a given year. Effective Jan. 1, the new threshold is one or more transactions that collectively raise at least $600 in revenue.
Some users are just now learning about the change in law because they got a notice from the payment platforms asking them to confirm their taxpayer information, including their legal name, address and Social Security number. The platforms need that information to make sure the income they're reporting for, say, "Mary Smith" is attributed to the right Mary Smith.
Here's a breakdown of the new rule and what it means for your 2022 tax returns. (If you're working on your 2021 taxes now, you still have to report all your income, but you won't be receiving forms from payment apps.)
What changed?
The change was tucked into the American 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 funded mainly with borrowed money. But it also sought to improve tax compliance by lowering to $600 the threshold for income reporting by "third-party settlement organizations." The change affects such companies as Paypal, eBay, Etsy and Airbnb. Zelle, a system that transfers money between banks, says it is not considered a third-party settlement organization.
The Congressional Budget Office projects that the new threshold will bring in more than $1.1 billion in 2023. Evidently, the CBO thinks an awful lot of side-hustle money wasn't being reported to the IRS.
To be clear, there's nothing new about the duty to pay taxes on income from sales or services. As the IRS explains in Publication 525, the obligation extends even to profits from the sale of personal items or hobby collectibles. So if you buy a rare jazz LP 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 such sales, so if you paid $300 for the LP and then sold it for $5, you can't write off the $295 you forfeited.
The difference now is that Paypal, Airbnb and other third-party settlement organizations will be sending far more Form 1099-Ks to the IRS and to their customers. The forms for 2022 are due to go out in January 2023.
What do you need to do?
The new reporting requirement, however, won't necessarily deter tax evaders, and it may cause problems for casual users of these platforms.
One issue is that 1099-Ks report your revenue, 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 that says you received $800, even if the furniture cost you far more than that.
Similarly, payment apps know only 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 via 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 rented out your home fewer than 15 days a year.
To cut down on the number of unnecessary 1099-Ks, some payment apps are ignoring the transactions made on personal accounts and focusing exclusively on business users.
Cash App, for example, tweeted on Feb. 4 that it will send 1099s just to users enrolled in its Cash App for Business program. "Day-to-day activity, like sending your friend money for dinner or requesting cash for concert tickets, isn't something you'll receive a 1099 for," the company said.
As a result, though, sales of goods and services on personal accounts that should be taxable will go unreported by some of these apps.
Venmo goes one step further to try to identify potentially taxable transactions. Any sale, whether from a business account or a personal one, will be counted toward the $600 threshold if the buyer selects "purchase protection," an optional guarantee against fraud.
Again, sales proceeds aren't profits, and only profits are supposed to be taxed. So while sellers are expected to include the money reported on the 1099-Ks in their gross income, they should use other forms to deduct the cost of the goods they sold (keeping in mind that you're not allowed to claim losses from the sale of personal items).
That's not an issue for businesses, which keep track of their costs and can deduct them easily on their business tax forms. But it's more of a challenge for consumers who use online marketplaces to unload years-old goods or collectibles.
"The new 1099-K reporting is going to cause questions and confusion for taxpayers who haven't received them before," said Kathy Pickering, chief tax officer at The Tax Institute at H&R Block. "So in situations where someone is unsure, we would always recommend that you consult a tax professional on your specific circumstances."
You might be tempted just to ignore any 1099-Ks you receive for unprofitable sales of personal items. But the IRS won't be ignoring them. So Pickering suggested filing a Form 8949 to show that the 1099-K amounts did not produce any taxable gains.
It's always a good idea to have receipts on hand should the IRS tag you for an audit. So start gathering a paper trail for your more valuable personal goods, just in case you unload them in a way that generates a 1099-K.
