It was just announced that, in absence of Congressional action, the IRS is postponing the revised $600 Form 1099-K threshold (enacted by the American Rescue Act of 2021) for ecommerce apps such as eBay, ETSY, PayPal and Venmo, reverting to the old $20,000 threshold. Although no determination has yet been made to whether this only pertains to 2022 (forms required to be filed by January 31, 2023) or if it will be permanent, this is good news as IRS admits that the $600 threshold would result in mass confusion. The reason is obvious. At a threshold of $600, someone who sold a personal item that cost a greater amount but not entitled to deduct a loss on their tax return (losses from the sale or exchange of personal items cannot be deducted from individual income on Form 1040) would need to report the sale proceeds from the 1099-K as Other Income (Schedule I) of their tax return. If the basis (cost) was greater, the deduction, limited to the amount of proceeds received, would be also reported on Schedule I as an adjustment resulting in no gain or loss. If for some reason the item was sold as a gain, the transaction would be capital in nature and reportable on Schedule D.
IRS also acknowledged that the $600 threshold would most likely have resulted in possibly millions of IRS CP2000 matching notices being mailed to taxpayers who either failed to report the “loss”
transactions or reported them incorrectly and the confusion and burden imposed on the taxpayers as well as the effort imposed on IRS to deal with taxpayer responses to these matching notices.
Proceeds received for the sale of goods as a business (by a Sole Proprietor or Single Member LLC are reportable on Schedule C as income from self-employment where the cost is reported as Cost of Goods Sold, and of course other business operating expenses would be deducted on Schedule C as well. Any resulting gain would be subject to Self-Employment tax (Social Security contributions) in addition to income tax. Business operating losses are deductible from other income and excess losses can be carried forward to future years.
Although proposed tax legislation amendments, such as the Snoop Act (introduced in February 2023), that would have returned the reporting threshold to $20,000 has little chance of being passed, the delay gives both IRS and the taxpayers time to understand this requirement better but most importantly, it gives IRS an opportunity to draft regulations necessary to better achieve the legislative goal of closing the tax gap while mitigating burdens such as that which would result from a cash app being used for personal cash transfers to friends and family such as cost sharing or sending someone a wedding gift that would not be taxable because it was a gift. Regardless, however, the burden of proof pertaining to matters such as large gifts, would most likely be the responsibility of the taxpayer-however for such matters reported on a Form 1099-K or other 1099-K errors, the recipient would need to contact the App platform to seek a correction.