Updated: Delayed to 2023 - PayPal, Venmo issuing 1099-Ks

[Montecfo]

Taxes are due on hobby income. No deduction for hobby expenses. This is true whether or not you get a 1099-K and it's been this way for years, so nothing new here except that when the reporting rule finally goes into effect a lot of people will no longer be able to evade the tax on their hobby income.

I know this is technically the rule but it kind of defies logic. If you have a "hobby" that makes money you are probably going to want to report on schedule C. That way you can accurately reflect the net income.

The controversy comes into play when you have a "business" that never seems to make money. That creates audit risk.

Never heard of a schedule C profitable business having expenses disallowed on audit because it is actually a "hobby".

 

[gauss]

I know this is technically the rule but it kind of defies logic. If you have a "hobby" that makes money you are probably going to want to report on schedule C. That way you can accurately reflect the net income.

The controversy comes into play when you have a "business" that never seems to make money. That creates audit risk.

Never heard of a schedule C profitable business having expenses disallowed on audit because it is actually a "hobby".

I agree, except for the first part of the first sentence. I think the term "hobby income" is a bit misleading.

My understanding is that it is the term that the IRS applies to an activity that it does not consider to rise to the level of a business. It is the fact that it doesn't rise to the level of a business that is the real problem -- no that it can be construed as a hobby.

As such, I don't think the fact that you have a true hobby is the problem, but rather that it is unprofitable, you don't keep professional records, etc etc. The IRS position is that you can't deduct losses generated by this non-business activity that they have label with the "hobby income" term.

One safe harbor for a business vs a hobby is that if the activity is profitable 3 out of the last 5 years then it will not be reclassified by the IRS as a hobby.

There is no requirement that a business is actually profitable 3 out of 5 years if the facts and circumstances of the individual case support that it is indeed a business (ie see the list of the 9 tests of a true business previously posted).

But if you are indeed profitable 3 out of 5 years, you shouldn't need to worry that it will be declared a hobby, not a business, due to this safe harbor test.

-gauss

 

[disneysteve]

While I agree with you about the difference in how the two are taxed and reported, I think @disneysteve's point is that both are supposed to be reported. I think @disneysteve pointed out in an earlier post that some people have the mistaken idea that hobby income isn't taxed whereas business income is.

Exactly. So many people think they don’t have to report their income if they call what they’re doing a hobby rather than a business, even if they’re making thousands of dollars a year from it.

 

[disneysteve]

If you have a "hobby" that makes money you are probably going to want to report on schedule C.

Yes because what you actually have is a business and should be filing accordingly. It is greatly to your benefit since you get to deduct your expenses rather than being taxed on your gross income.

 

[jkern]

Plenty of comments here on the $600 limit. I think mostly it's just the change that people are reacting to.

Other sources of income have had much lower reporting limits for a while. Dividends and capital gains income need to be reported to the IRS even if it's a dollar. W-2 wage income needs to be reported to the IRS even if it's a dollar. Interest income needs to be reported to the IRS over $10 (and you should report on your tax return if over 50 cents).

Those don't raise our ire because we've become accustomed to them because they've been that way for years.

When the government looks for sources of tax revenue, there are plenty of options. But a gig economy that is apparently large enough in aggregate and previously mostly underground will remain a prime target.

(For the record, I oppose tax evasion by both billionaires and eBay hobbyists.)

The big difference is that W-2 Income and Interest Income is always taxable. Transfer of cash from Venmo is far from always taxable.

 

[SecondCor521]

The big difference is that W-2 Income and Interest Income is always taxable. Transfer of cash from Venmo is far from always taxable.

Well, there are (at least) two different complaints about this whole 1099-K thing:

1. The dollar limit for taxable income is too low, and the IRS is going to catch hobbyists who until now were enjoying their under-the-radar income.

2. The structure of the reporting is broken, because some 1099-K stuff is taxable and some isn't (as you rightly point out).

They're intertwined, but mostly I was writing about the first.

 

[jkern]

My concern was always that I had to contact the IRS to prove that 1099-K income is not taxable.

Here is my latest dealings with the IRS: I was doing taxes for my friends son. Mid tax season the IRS changes their rules and allows a $10K exemption for Unemployment income. They didn't make the adjustment correctly for my friends son. I spent 15 hours on the phone and another 5 hours filling out additional forms and working with the IRS. It took 1 1/2 years before he got his $1,000 back. Right or wrong, it's terrible dealing with the IRS.

 

[wildsun]

She has sold items on and off, only at 1 annual craft fair, Covid years excluded. This is her first year selling for about 4years now. And no, income has not been reported in the past. In order to make it a business, there must be records of costs and sales etc. That effort has not been made.

To restate the situation. She makes things for her enjoyment not to sell for the purpose of making a profit. All of her items are one-of-a-kind. Her hands are busy while watching TV and many days, she spends in her hobby room working on various projects. Many of her items go directly to friends or become home decor in our own home. Items get made primarily for the challenge and the enjoyment. Unfortunately, once done, things not given as gifts or hung on our wall, simply get put away into storage. That gets to become overwhelming. The selling part is simply to minimize the clutter. Calling it a "business" cannot be justified IMO.

Right or wrong, up until now we have been considering her sales similar to that of a garage sale. The items were made for personal use/gratification. When she does go to sell, I would guess that her gross sales minus actual cost might be a couple of hundred dollars per year. As such, we did not report it. I feel comfortable doing so. If "the Square" reports her gross sales on a 1099-K this year, then it will become messy. I guess I'll just wait and see if we get a 1099-K.

P.S. It looks like her "The Square" sales were just a bit over 400 so no 1099-K should be issued.

I think she has a business, but agree this falls into the grey area.

There are good things about operating as a busines, so everyone shouldn't look to justify the "hobby" approach just because it sounds simpler.
1) Wife who watches TV while producing is no different than a warehouse person listens to local radio while s/he processes or packs orders. The radio if bought by the business, is an incidental business expense. The TV running while the craftsperson makes their item can be argued to be a deductible expense in many circumstances.

2) People here equate taxation of "hobbies" as something that requires accounting to happen. But its always good to know more specifically what your hobby costs you. and then compare that to what revenue is generat3ed by the hoppy.

Besides seeing profit and loss, you may see its okey to spend more on materials because revenue exceeds costs. You may be surprised at what costs and revenues are, and as a result change the way you operate, decide to drop the hobby, or decide to more formally pursue it as a business.

3) Once you have real numbers, and think about the situation, you have a firmer basis for making the hobby vs business designation. Making the right decision can help you avoid future questions or audits from the IRS.

 

[ownyourfuture]

I was curious to see how Paypal was handling this so I looked it up for my account. I have no transactions that are logged for IRS reporting. The Paypal help screen says this:

"Both PayPal and Venmo offer a way for customers to tag their peer-to-peer (P2P) transactions as either personal/friends and family or goods and services by choosing the appropriate category for each transaction. Users should select Goods and Services whenever they are sending money to another user to purchase an item, like a couch from a local ad listing or concert tickets, or paying for a service."

So, as long as you and your peers check the right boxes, your gifts won't get flagged. If you never use Paypal to receive taxable income, don't give them your SSN. If you do, my guess is you need to pay close attention to make sure only the real income is flagged > PITA.

I had one large sale/transaction through PayPal this year. A private transaction of $800 for a football card. I looked up that transaction last night. How do you know if a transaction is logged for IRS reporting ?
I didn't notice anything out of the ordinary.


I'll include two screenshots. The 1st shows general payments to my neighbor for clearing snow out of my driveway.
The 2nd is the sale of the football card, also listed under general payment. (As you can see, fees were applied to the card sale)
Does this mean it will be logged for IRS reporting ?

Thanks in advance.

Follow up question: How can you have a PayPal account without them requiring your SS# ?

Because they pay interest on your cash, it seems like that would be a requirement.

 

[SecondCor521]

I had one large sale/transaction through PayPal this year. A private transaction of $800 for a football card. I looked up that transaction last night. How do you know if a transaction is logged for IRS reporting ?
I didn't notice anything out of the ordinary.

You'll know if you get a 1099-K from Paypal.

Before a few days ago, you were likely to get one. The IRS has announced that they're not going to enforce the new reporting rules this year. So maybe Paypal will send you one, maybe they won't.

Whether they send you one or not, you should report the income from the card sale.

I'll include two screenshots. The 1st shows general payments to my neighbor for clearing snow out of my driveway.
The 2nd is the sale of the football card, also listed under general payment. (As you can see, fees were applied to the card sale)
Does this mean it will be logged for IRS reporting ?

Thanks in advance.

Probably. The first transaction was probably "friends and family" and wouldn't be considered income. The second one, with fees, was probably a business transaction and presumed income by the IRS.

Follow up question: How can you have a PayPal account without them requiring your SS# ?

Because they pay interest on your cash, it seems like that would be a requirement.

You probably gave them your SSN at some point and just forgot. If they don't have it and need to issue you a 1099-K, they'll likely ask you for it at some point.

 

[CRLLS]

I'm just spit balling here. If you paid a fee when you received payment, then it is likely a reportable transaction. When a person send money to a friend/family, they pay a fee and the receiver pays nothing.

 

[ownyourfuture]

You'll know if you get a 1099-K from Paypal.

Before a few days ago, you were likely to get one. The IRS has announced that they're not going to enforce the new reporting rules this year. So maybe Paypal will send you one, maybe they won't.

Whether they send you one or not, you should report the income from the card sale.



Probably. The first transaction was probably "friends and family" and wouldn't be considered income. The second one, with fees, was probably a business transaction and presumed income by the IRS.



You probably gave them your SSN at some point and just forgot. If they don't have it and need to issue you a 1099-K, they'll likely ask you for it at some point.

Thanks for your input. Paypal definitely has my SSN. I've had a cash account there that pays interest since 2002, so they need it.

I never do my taxes until mid February at the earliest, so I guess I'll just wait and see what happens. I know my cost basis for the card, but no one else does. It was a private transaction back in 2002. What is a person supposed to do if they don't remember the cost basis of an item ?

You & I know what they're going to do, lie through their teeth.

My thoughts on this move by the IRS, congress, or whoever you want to blame is that it's ridiculous. It's not the action itself, if someone is doing 20 K in sales on eBay or another online marketplace, I think they should have to report it.
But to lower it all the way down to $600 is crazy.

I strongly suspect the CPA lobby had a hand in this.

For those of you who strongly support it, here's a question.
Hypothetically, let's say you purchased a Bang & Olufsen turntable for $1000 back in the 80s. This past summer you put it out at a garage sale, & someone offered you $1700 cash. You had no idea it was worth that much, so after going on eBay and making sure the offer of $1700 was fair, you take the cash.

Are you going to tell me that you'll include the $700 LT capital gains the next time you do taxes ?

 

[disneysteve]

I know my cost basis for the card, but no one else does.

Even with the new 1099 rule, there is still a large honor system component to everything. I sell on ebay regularly. 95% of my purchases for resale are done with cash at estate sales and yard sales. There is no record of any kind of how much I paid for something except for my own spreadsheet that I maintain. The IRS has no way to know or prove if I paid $5 or $25 or $50 for that item that I resold for $100. It's completely on me to report my cost basis.

For those of you who strongly support it, here's a question.
Hypothetically, let's say you purchased a Bang & Olufsen turntable for $1000 back in the 80s. This past summer you put it out at a garage sale, & someone offered you $1700 cash. You had no idea it was worth that much, so after going on eBay and making sure the offer of $1700 was fair, you take the cash. Are you going to tell me that you'll include the $700 LT capital gains the next time you do taxes ?

I think it's fair to say that virtually nobody is reporting cash sales from yard sales or Marketplace or Craigslist or any other cash transactions, and they obviously wouldn't generate a 1099.

 

[SecondCor521]

Thanks for your input. Paypal definitely has my SSN. I've had a cash account there that pays interest since 2002, so they need it.

I never do my taxes until mid February at the earliest, so I guess I'll just wait and see what happens. I know my cost basis for the card, but no one else does. It was a private transaction back in 2002. What is a person supposed to do if they don't remember the cost basis of an item ?

You & I know what they're going to do, lie through their teeth.

One is supposed to keep records. If one does not keep records, they can always use a $0 cost basis. Or they are allowed to estimate.

Being the only one to know one's cost basis doesn't excuse tax evasion.

Yes, plenty of people lie on their tax return.

For those of you who strongly support it, here's a question.
Hypothetically, let's say you purchased a Bang & Olufsen turntable for $1000 back in the 80s. This past summer you put it out at a garage sale, & someone offered you $1700 cash. You had no idea it was worth that much, so after going on eBay and making sure the offer of $1700 was fair, you take the cash.

Are you going to tell me that you'll include the $700 LT capital gains the next time you do taxes ?

I don't agree with the way things are going on this 1099-K stuff. There are a lot of laws that I personally disagree with. However, if I'm aware of them, I either (a) follow them, or (b) civilly disobey with full knowledge that I may have to face the consequences.

In your scenario, if I thought I had a capital gain, I'd report it and use a cost basis as determined above.

 

[disneysteve]

One is supposed to keep records.

I don't think the average person keeps records of what they pay for everything they purchase. I certainly don't. I do for items bought with the intent of reselling them but not for personal purchases, household goods, clothing, etc. I have no idea how much our toaster oven was, for example, so if we get a new one and I sell the old one on ebay, I would just have to guess at our cost basis. It's that sort of stuff that becomes problematic with the 1099 threshold changing. I still support the change but also recognize the issues it creates.

 

[youbet]

Yes, plenty of people lie on their tax return.

So true. And it's a trait that carries over to the rest of their lives.

 

[Morgan22]

No, we are not paying fees and currently use old fashioned checks so it is not an issue. We were planning to start using Zelle until hearing about this a few months ago.

Frankly, I get what they are trying to do and am not opposed to it. They are trying to collect taxes owed by people operating "underground" and getting paid in electronic cash. I just think the approach they are taking is inherrantly flawed and will cause a whole lot of headaches for innocent people.

I think you should be comfortable using Zelle. Zelle will not be required to report to the IRS. It may have something to do with Zelle not holding any funds. They just assist in managing bank to bank ACH transfers.

But of course always keep your ear to the ground to see if the rules change in the future.

 

[donheff]

I had one large sale/transaction through PayPal this year. A private transaction of $800 for a football card. I looked up that transaction last night. How do you know if a transaction is logged for IRS reporting ?
I didn't notice anything out of the ordinary.


I'll include two screenshots. The 1st shows general payments to my neighbor for clearing snow out of my driveway.
The 2nd is the sale of the football card, also listed under general payment. (As you can see, fees were applied to the card sale)
Does this mean it will be logged for IRS reporting ?

Thanks in advance.

Follow up question: How can you have a PayPal account without them requiring your SS# ?

Because they pay interest on your cash, it seems like that would be a requirement.

I have no idea. I just looked up the guidance on my account. It sounds like it only applies to categorizing your sales. It doesn't say whether the purchaser will see how you have categorized the transaction. I certainly hope they present the information so you can take issue with an incorrectly coded transaction.

 

[sengsational]

If you are not a business and not filing Schedule C, then you can handle the selling of personal goods as follows:

If you are selling personal items on ebay etc and you sell them for more than you paid for them, then you owe captial gains tax which should be reported Schedule D (Capital Gains/Losses).

If the personal goods are sold for less than you paid for them, and you didn't receive a tax document, then normally you wouldn't report it because your net capital gain/loss would be $0. Personal items are not allowed a capital loss.

If you a receive a 1099 for selling personal goods that you sold for less than your cost to acquire them, then you would file a Schedule D, but use the appropriate code to not allow a loss. No tax would be due.

-gauss

Doesn't this whole thing run afoul of the paperwork reduction law? Seems like the $0 basis is guilty until proven innocent.

As to the paperwork required for the turntable $700 "capital gain" example, couldn't one charge for storage? Paid $1000, stored 25 years at $3/mo ($900), so generates a $200 loss? Don't get me started on capital gains on inflated currency.

My concern was always that I had to contact the IRS to prove that 1099-K income is not taxable.

Here is my latest dealings with the IRS: I was doing taxes for my friends son. Mid tax season the IRS changes their rules and allows a $10K exemption for Unemployment income. They didn't make the adjustment correctly for my friends son. I spent 15 hours on the phone and another 5 hours filling out additional forms and working with the IRS. It took 1 1/2 years before he got his $1,000 back. Right or wrong, it's terrible dealing with the IRS.

Hopefully they'll tune their letter sending algorithms such that they won't bury themselves in challenges to their assessments of additional taxes.

 

[gauss]

I don't think the average person keeps records of what they pay for everything they purchase. I certainly don't. I do for items bought with the intent of reselling them but not for personal purchases, household goods, clothing, etc. I have no idea how much our toaster oven was, for example, so if we get a new one and I sell the old one on ebay, I would just have to guess at our cost basis. It's that sort of stuff that becomes problematic with the 1099 threshold changing. I still support the change but also recognize the issues it creates.

It will be interesting to how the IRS approaches this a year from now, given that they have more time to digest it. Asking everyone to keep receipts for personal items seems like a high bar.

That being said, I believe that the majority of used personal items sold at ebay/garage sale do so at a loss and thus are not taxable.

If I received a 1099-K for this case (items that loose value) , I would probably consider reporting on Schedule D and setting the cost basis equal to the sale price -- perhaps with an explanation about the nature of the goods (or perhaps a full list of them).

-gauss

 

[ShokWaveRider]

I thought the rule was lifted for 2022? So no 1099-Ks for anyone who has not has 200 transactions or $20k in sales.

So it is still on the honor system for this year ........ am I missing something?

I have about $5k of receipts (not actual, just misc. sales, I do not track costs, it is a hobby) this year that will go on my return, not sure what the issue is ...... this year.

 

[gauss]

^ Agreed that this should not be an issue on 2022 returns unless the traditional limits are exceeded (200/20,000).

IRS has said that it is delaying the new reporting requirement until 2023 payments.

-gauss

 

[SecondCor521]

I thought the rule was lifted for 2022? So no 1099-Ks for anyone who has not has 200 transactions or $20k in sales.

So it is still on the honor system for this year ........ am I missing something?

Since the enforcement delay was rather late, it is possible that the issuers of the 1099-Ks have already done the work to send them out according to the $600 limit already.

Those issuers now have a choice to make: (a) spend the postage and customer support costs to send them out anyway in compliance with the law even though the IRS says they don't care for 2022, or (b) spend some more development and testing costs to roll back to the 2021 reporting limits.

Which is cheaper and better may differ by issuer. Specific issuers may choose to make announcements about their plans.

 

[MichaelB]

Are there any state specific reporting requirements that still require TPSOs and similar organizations to report transactions and send 1099-k?

 

[ncbill]

Should've left it at $20k and indexed that annually for inflation.