The American Rescue Plan Act of 2021 lowered the filing threshold for Form 1099-K, Payment Card and Third-Party Network Transactions, to $600 (from $20,000) and removed the minimum transaction threshold (previously 200). While there are several bipartisan proposals in Congress to adjust either or both thresholds, it remains unclear whether this would become part of a late-fall package or other future piece of legislation. In the meantime, taxpayers should prepare themselves for receipt of these forms come January 2024. The following chart summarizes some key characteristics of Form 1099-K and how they are used in an individual tax return.
|Who prepares form 1099-K?||Payment card companies, payment apps, online marketplaces (ex. PayPal, Venmo, Square, Stripe, Cash App, Etsy, eBay, Facebook Marketplace and others).|
|Who receives Form 1099-K?||
Taxpayers receiving payments for items sold, services provided or property rented. Examples include:
|What is included in the gross amount reported?||Total payments received. This amount can also include payment fees, credits, refunds, shipping costs or other discounts. Some of these may be deductible and can offset gross receipts reported.|
|What happens when selling a personal item at a loss?||Payments for the sale of personal items using an online marketplace or payment app can lead to receipt of a 1099-K. If sold for a loss, report the gross payment amount from Form 1099-K in Box 1a on Part I; line 8z; other income. Offset this amount in Box 1a; Part II; Line 24z; other adjustments; “Form 1099-K personal item sold for loss.” Since losses from the sale of personal items are not deductible, the net result of this reporting should be zero.|
|What happens when selling a personal item at a gain?||Gains on sales of personal items are taxable and should be reported on both Form 8949, Sales and other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses.|
|What happens when a Form 1099-K is received by mistake?||
Contact the issuer immediately and have a corrected Form 1099-K issued. If this is not possible, enter the error amount on Schedule 1 of Form 1040; Part I; lune 8z; other income. “Form 1099-K received in error; amount.” Then adjust the amount in Part II; line 24z; other adjustments; “Form 1099-K received in error; amount.” Depending on the amount of the error, these amounts may offset and possibly net to zero.
|What amounts should not be reported on Form 1099-K?||Gifts, reimbursements or certain other amounts received using payment apps or other formats should not be reported on Form 1099-K. For example, cost-sharing a ride or meal with a friend, birthday or holiday gifts, payments between roommates for household expenses, etc. However, payment card companies and others may not know what amounts are or should be nontaxable. When possible, code such payments as non-business. If Form 1099-K is received in error, follow the steps above.|
Many taxpayers are expected to receive Form 1099-K given the lowered reporting threshold and the expansive use of these payment apps and online marketplaces. However, it is unclear whether the IRS has the ability to yet process all the additional paperwork. As a result, taxpayers should maintain careful records of online transactions subject to 1099-K reporting so that they can readily substantiate amounts disclosed on a tax return.
Please consult your Baker Tilly tax advisor or visit the IRS website for additional information. Also, our Baker Tilly 2022 year-end tax letter contains valuable background and filing insights with respect to Form 1099-K.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.