Back in October 2021 I wrote about the widespread concern of bank account transactions above $600 being reported to the IRS. This idea remains a proposal and has not been signed into law. However, baked into the American Rescue Plan, which was signed into law March 2021, cash apps and certain marketplaces will have an increased obligation to report on more transactions starting January 1, 2022. I’ve seen some misunderstanding related to this, so let’s clear it up now.
1) This impacts those receiving payments tagged as goods/services.
2) This does not impact those using the “friends/family” option when paying.
3) A person or business will receive a 1099-K from the cash-app or marketplace service if total payments exceed $600 in any given year. Prior to 2022, the total needed to exceed $20,000, so while this isn’t a new requirement, it’s a significant change.
4) A 1099-K will be considered reportable income for tax purposes. Be aware that what’s reported is gross reportable transactions. You may be able to reduce this amount by expenses, credits, discounts, refunds, fees, and basis. So it’s important to keep records throughout the year.
Let’s discuss.
Those of us using Venmo to send payment to one another (usually for reimbursement, splitting costs, etc) will not be affected. Those of us paying a friend or small business for service, but using the friends/family payment option (which is often preferred as no fee is assessed) are also not reportable. But paying under the business/goods option (which usually assesses a fee to the seller but also provides certain consumer/merchant protections) will be reportable to the IRS to the extent that more than $600 is cumulatively paid to the seller within the calendar year.
Two groups immediately come to mind.
First, side-hustle small businesses that created a business profile under Venmo. Think of ice-cream truck drivers in summer, custom shirt makers, and house cleaners. These transactions are automatically considered goods/services and will likely generate beyond $600/year. But very likely this business profile was done with the intention of tracking business income that was self-reported regardless of a formal 1099-K being generated. So hopefully for these people, the 1099-K is simply a formality vs a tax burden.
The second group that comes to mind are non-business sellers on popular sites like eBay, Poshmark, Mercari, and StockX. Everyday people use these sites to make some money on unwanted items. For very occasional users, the total sales should fall below $600. But for users who are simply selling an old phone or listing items from an annual clean-out, $600 will be extremely easy to trigger. This is the audience that I feel will be impacted the most in terms of paying income tax for essentially having a virtual yard sale. This will also likely boost the popularity of Facebook Marketplace, where items tend to be picked up locally and paid with cash or friends/family cash app. Especially since there is already seller fees to use services like eBay plus shipping costs and mandated state tax. Income tax may be the final straw.
The IRS is lowering the Form 1099-K reporting threshold. Starting on January 1, 2022, IRS regulations require all businesses that process payments, including online marketplaces like eBay, to issue a Form 1099-K to sellers who receive $600 or more in gross payouts. If you receive more than $600 in gross payouts over the course of the 2022 calendar year, we’ll provide a Form 1099-K to you by January 31, 2023. Your 2021 tax obligations aren’t affected by this change.
Keep in mind that you have “basis” in your yard-sale type items. You’re actually, in most situations, taking a loss at the time of sale. IE) You bought an iPhone for $1,000 and 2 years later are selling it for $600. At the $20,000 reportable threshold, this was a non-applicable issue for the vast majority. But now that 1099-K will be generated for so many more people selling on marketplace platforms, it remains to be seen on how dogged the IRS will be on having taxpayers prove their basis on these types of items. More information can be found at Turbotax.
At the onset of this change I expected guidance to be further updated as we saw reactions from consumers and audits from the IRS. And that has turned out to be true, to some degree. The IRS released a statement January 3, 2023 saying they will be delaying the requirement for third party platforms to report on amounts over $600, and will continue to simply expect reporting on just the original $20,000 threshold.
“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.
Practically though, the most popular platforms seem to have already stepped up to the plate to be able to report and are doing so. For 2021, I personally received a statement from Paypal for gross transactions exceeding $600 related to eBay sales. I simply explained to my CPA to offset the income by adding cost basis for the items sold. I expect the same for 2022 despite the IRS announcing this delay.
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