The IRS is taking a closer look at your fintech transactions. Starting in 2022, any transactions exceeding $600 and made through payment cards or apps (think Venmo and PayPal) must be reported by those platforms. They will send you, the recipient of the money, IRS Form 1099K next January. And it will be your job to determine how much tax you might owe on these payments, when added to your other income.
[Update: Zelle has posted that it isn’t required to send out a 1099K because it is not an “app” and doesn’t hold your money. They say they are merely a payments platform, so not required to send out 1099s. Here’s a quote from Zelle: “The law governing 1099K does not require Zelle to report transactions made on the Zelle Network® to the IRS. On the IRS page, you can find information that reporting by third-party settlement organizations applies only for transactions for the provision of goods or services settled through a third-party payment network. Zelle is not a third-party network because we facilitate messaging between financial institutions and do not hold accounts or settle funds.”]
To be fair, this isn’t a new concept – just a new, lower limit. In previous years, these service providers were required to report transactions exceeding $20,000, or if there were more than 200 transactions made. But starting this year – 2022 – every single transaction over $600 must be reported, as well as aggregate transactions over $600 to one recipient.
This reporting applies only to business transactions. The IRS specifically says: “Form 1099-K reporting does not apply to gifts or reimbursements made between friends and relatives.” Yet the presumption is that these payments are taxable income –unless you can demonstrate otherwise. Consider these scenarios:
• You sell your old bedroom set for $1500 on NextDoor, taking payment by Venmo. You’ll get a 1099K next January. It should be easy to prove you sold used furniture at a loss, with no tax due.
• You are a physical trainer or a cleaning person or a dog walker. Your clients find it easy to pay you weekly on Venmo or PayPal. Even if the transactions are for relatively small amounts, if the payments from one client total more than $600, the fintech platform will send you a 1099K.
• Your grandmother dies and leaves you all the contents of her house. You decide to sell all her stuff on eBay. And they send a 1099K next year. Don’t worry. Your inheritance comes to you tax-free. And when you sell immediately, you don’t have to figure out the cost basis, either. Since it was an inheritance, the “cost basis” is the value on date of death. And if Grandma died last month and you sell the stuff in the coming few months, there will be no gain.
• You’re a senior citizen and have taken in a roommate or your grandchild who pays you a monthly amount using Venmo. The TOTAL payments to you for the year will be more than $600 — so you will receive a 1099K next January from Venmo. And it is considered taxable income – unless your roommate is a dear friend or relative, just giving you a monthly “gift.”
• You’ve created a lucrative side hustle buying sneakers at an outlet mall and selling them online on eBay. If you sell one pair for more than $600, or make multiple transactions with the same buyer, eBay will be sending you a 1099K next January. So keep good records of the costs of goods sold, mailing expenses, and the money you receive for each sale. The difference is a taxable profit.
A Key Loophole
Under the current estate and gift tax law, you are allowed to gift up to $16,000 per year to any number of people. There is no tax consequence to the giver or the recipient of that gift! So, if you love your cleaning lady, by all means give her a bi-weekly gift. And thank goodness our senior found a “friend” to share expenses.
How will the IRS know which is a gift and which is income? These apps all have a way to designate whether they payment you are making is to a friend, or in payment for a service or goods. It’s up to you to decide which is which – and note that on the transaction platform.
By now you must be asking how the IRS – which is over a year late in processing 2020 returns and sending out millions of refunds – can possibly start tracking all these transactions and collecting appropriate taxes on them.
That’s a good question. Why create another impossible task if you can’t perform the ones already assigned to your agency?
Years ago, the “underground economy” was driven by cash payments. Recently, we have moved into the “cashless society” driven by technology. Now the IRS wants its share. Technology allows them to track it. And that’s The Savage Truth.