You may have seen, or soon will see, lots of articles and Facebook posts warning you about the change in the way Venmo, Paypal and CashApp like systems will be taxed. I know this, because the rules were supposed to go into effect for 2021, and there were lots of scary articles on the subject back then. The change was postponed and went into affect for 2022, so NOW you need to be worried about it.
No. Not really. Okay, maybe a little...
Even so, the other bit of inaccuracy that is glossed over trying to freak you out is that even if you use VPC to send or receive money, the chances are very low that you will get a 1099K unless you are running a business, or sell things through third party sales sites like Amazon, E-bay, ticket resellers or some others. You see, when you use VPC, it will ask you to identify if the transaction is a sale or business transaction. If the payer checks that it is personal, it won't count toward the $600 limit and won't be included even if your business transactions exceed the $600 and are reported. You also don't get buyer protection when you indicate it is personal - just something to be aware of.
So that leaves us with a few more questions:
1. What kind of things will I receive a 1099K for (All the below assumes you have more than $600 in transactions from an individual reporting VPC)?
Answer: If you sell things on one of the popular resale sites, sell something to an individual and they pay via a VPC and indicate it was a sale and not personal, if you resell sports or concert tickets via a website, or if you run a business and accept credit cards or VPC payments.
2. What kind of things shouldn't generate a 1099K?
Answer: Using a VPC to split the check at a restaurant, sending money to friends and family via a VPC, and any other sorts of friends/family/personal transactions that don't involve selling things.
3. How do I report this income?
Answer: That depends on the nature of the transaction and if you are running a business.
BUSINESS: If you are running a business you should already be tracking and reporting all of your income and not relying on the 1099 forms. 1099 forms are to help the IRS keep you from cheating and the main thing you should be doing with them is making sure they aren't reporting inaccurate numbers to the IRS. I say again: BUSINESSES SHOULD TRACK INCOME INDEPENDENTLY OF 1099 FORMS! This is not a business post so I'm not going into details on this. I have other posts for that and you should already be aware of those things. Check HERE for business info. HERE if you are a real estate agent and HERE if you have a Multi-Level-Marketing business. Also HERE if you get a 1099K associated with rental property.
HOBBY INCOME: If you do something that could be a business, but mostly for fun, it is a hobby and is reported differently. Keep in mind that a business that always loses money risks being classified as a hobby if the IRS decides to come checking. Again, beyond the scope of this post. Anyway, a 1099K received for a hobby just reports the income on Line 8i of Schedule 1 and does not get any deductions.
SELLING PERSONAL STUFF: If you get a 1099K for selling personal stuff, it is only reportable on your tax return if you sold it at a gain (sold for more than you paid for it). Anything sold at a loss technically doesn't need to be reported, BUT if you get issued a 1099K, you want to report it. It gets reported on Schedule D, with a separate section for Long Term (things you owned more than 1 year) and Short Term. You CANNOT deduct a loss on personal stuff so, effectively, everything you sold at a gain is reported on separate lines from your losses. The big thing is that you want the Gross Proceeds lines to total up to what your 1099K says. I like to report one line of 1099K Gains, with the Gross Proceeds and Basis (what you paid for the item) and another line with 1099K Loss, making Basis match the Gross Proceeds number so it doesn't generate a loss. You technically need a line for every item sold, just make sure to not generate losses. Most software will ask you to identify the type of transaction and will automatically ensure personal item losses aren't deducted. This section is the same you would use for selling concert tickets through a third party vendor. If you have a lot of transactions, you should track each one yourself to make reporting easier, or seek a professionals help -though they will need data on what you sold and what you paid for it.
SELLING THINGS YOU INVESTED IN WITH THE IDEA OF MAKING A PROFIT:
These are also reported on Schedule D just like the above, except that in this case you CAN deduct the losses and offset gains with them (or even deduct some off of your regular income if you have an overall loss). There are limits to these losses. You can't just SAY you invested in it to make a profit, especially if it doesn't pass the smell test such as selling things that would obviously not be expected to go up in value such as non-antique furniture you bought and used personally.
4. What do I do if I get a 1099K when I shouldn't have, or it has the wrong amount on it?
Again, this depends on if you are a business or not...sort of. Basically, if there are slight discrepancies on a business' 1099K, such as refunded amounts or other accounting differences, you have ways of making the adjustment directly on the business tax return. Obviously a completely wrong 1099K should be corrected by the issuer. For personal stuff, the safest way is to get the issuer to fix the 1099K. This is easier said than done sometimes, and you should track all of your efforts to get it corrected. There should be a number for both the vendor and what is called the Payment Settlement Entity on the 1099K. Contact both and keep copies or notes on all communications. The idea is that the IRS receives the 1099K and if the numbers don't match, you could end up with a letter asking for taxes. If you can't get the form corrected, the IRS says you should add a note to your return explaining the issue. Honestly I would seek a professionals help filing a tax return in this case.
The biggest mistake you can make is not reporting the 1099K. The IRS uses computers to match values from these information forms and compare them to your tax return. This is the most common cause of correspondence from the IRS and usually results in a CP2000 Letter suggesting changes to your tax return. They aren't the end of the world, but can be a pain with the IRS so far behind right now. Check HERE if you get one.
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