The New 1099K Rules for 2023 Tax Season: What You Need to Know
Today, I’m summarizing what you absolutely must know about the new $600 form 1099-K rules. Now if you’re thinking… wait a minute… the IRS delayed this last year, I’ve heard Congress is working on increasing the limit to say $5,000 or even higher.
Well, I would say that… anything is possible. But the way Congress is functioning right now, I wouldn’t expect any postponements with regard to this.
I could be wrong, but if not… I’m sharing the critical information that you must know to prepare yourself for these upcoming tax changes. In addition, I will provide an example of how these changes might impact you in the real world.
But Before That, What’s Changing?
As part of an ongoing effort to promote tax compliance, the IRS has revised the 1099-K form requirements. Basically, if you receive more than $600 from a payment settlement entity like PayPal, Venmo, or eBay, you’ll now receive an IRS form 1099-K.
If you’ve never received this before, you will have to report the information on your tax return. If you don’t, you’ll receive a nasty letter from the IRS.
Why Is This Happening?
You might be wondering why we’re they’re doing this. It’s part of a larger plan to close the tax gap, or basically screw the middle class. The IRS wants to make sure everyone is paying their fair share. After all, taxes keep the country running!
Are There Any Loopholes to This?
Naturally, there are some. For example, cash transactions, are typically not reported to the IRS unless you deposit significant amounts into your bank account. Also, payments received via Zelle should not trigger a 1099-K, because it’s considered a normal banking transaction.
And let's not forget cryptocurrencies—while some platforms issue 1099-K forms, not all do, making it a grey area, for reporting.
So while the new rules aim to catch more unreported income, there are still avenues where reporting can slip through the cracks.
Naturally, with all of these changes, you can expect stricter verification processes with any of these payment platforms. This means you'll need to validate your identity and tax information more rigorously. I know some people won’t like this, viewing it as intrusive, and I don’t blame you. But if you want to use their payment platform, you need to play by their rules.
Here’s a Real World Example:
So there's this guy Alex. He has been selling vintage collectibles on eBay. In the past, he never had to worry about receiving a 1099-K because he didn't meet the previous threshold of $20,000 and 200 transactions. Fast-forward to 2023, and the game has changed. Now, if you've made over $600 in total sales, eBay will send you a 1099-K.
Let's say Alex ends the year with total sales totalling $5,000. Come tax season, eBay sends Alex a 1099-K form, reporting those earnings directly to the IRS. Now, this is important: Alex has to report this $5,000 as income on his tax return. Specifically, he needs to fill out a Schedule C Form, which is for reporting Profit or Loss from Business.
On this form, Alex can also deduct business expenses—like shipping costs, eBay fees, or the cost of originally acquiring the vintage collectibles. He does this to accurately reflect his net income from eBay sales.
If Alex ignores the 1099-K or forgets to file a Schedule C, he could face penalties from the IRS. So it's not just about making sales; it's about keeping accurate records and understanding the tax obligations that come with this type of income.
I know what you might be thinking... "What should I do if I don't have documentation for the cost of items I've sold?"
If you don't have records of what you paid for the items you sold, you're in a bit of a tough spot when it comes to reporting your income and expenses for tax purposes. Ideally, you'd keep receipts or some form of documentation to establish your cost basis—that's the amount you originally paid for the item. Without this information, you can't accurately report your expenses, and that could increase your taxable income.
But seriously, who keeps receipts for everything they’ve ever purchased?
Some folks use reasonable estimates to figure out their cost basis. It's a bit like an educated guess, based on what you honestly believe the items cost you. However, it's not without risk, because if the IRS ever decides to take a closer look, you may need to back those estimates up somehow.
So, in a situation like this, your best bet is to talk to a tax professional. They can guide you through your options and the potential risks. Even with reasonable estimates, you're basically hoping for the best, and that the IRS doesn't decide to scrutinize your return.
Here are Some Final Thoughts.
In a nutshell, it's important to be aware of these changes to avoid last-minute surprises. I hope this helps clarify the confusion of the new $600 1099-K reporting.
Thanks for reading and see you in the next blog post!