If the new 1099-K reporting thresholds have you confused as an online seller or payment app user, you’re not alone. But don’t worry — we’re here to help you separate fact from fiction.
Below we’ll address some common misconceptions you might have heard about these changes and the truth about how your taxes could be affected.
Misconception 1: This is a new tax that I will have to pay on my profits.
The truth: This year’s change is not a new tax imposed on online sellers but a new reporting requirement for third-party payment apps like PayPal and online marketplaces like eBay or Etsy.
Any income derived from a sale has always been reportable income. However, previously, you would not have received a Form 1099-K from these companies unless you hit 200 transactions and had $20,000 in gross payments annually. In 2022, the IRS lowered this threshold. Now, companies like eBay and PayPal must report gross sales that equal or exceed $600 on a Form 1099-K.
Due to these changes, many sellers who have not received a Form 1099-K before will be receiving one next year.
Misconception 2: All the transactions on my 1099-K are taxable.
The truth: Receiving a Form 1099-K doesn’t automatically mean you’ll owe income tax on the gross sales amount reported to you on the form. You are taxed on your net income (profits), but a 1099-K only shows your gross payments, even for items sold at a loss.
The amounts reported on Form 1099-K do not account for your cost basis and any adjustments for fees, refunds, credits, etc. If you sold an item at a net loss against its original cost basis, there is no gain to report, and you will not be responsible for any income taxes on the sale.
When filing your tax return, use your Form 1099-K as an informational document to help you fill out Schedule C to report business profit and losses (if you are a sole proprietor) or Schedule D to report capital gains and losses (if you are a casual seller). Then make any necessary adjustments to make your tax return consistent with your own records. That’s why good bookkeeping is key!
If you choose to file with TaxAct, we’ll do all the heavy lifting for you. We ask detailed questions about your 1099-K so we can fill out the proper tax forms for you.
Misconception 3: I’m only a casual seller, not a business, so I don’t need to report my sales profits as income.
The truth: Taxable income includes any income made from sales, whether you’re a casual seller or a business.
For example, let’s say your hobby is thrifting old pieces of furniture, and sometimes you flip them for a profit. Last year, you bought a used piece of furniture for $100, restored it, and sold it on eBay for $700. This gives you a $600 profit. Unlike a business, as a hobby seller, you cannot deduct expenses incurred before the sale, such as the cost of restoring the furniture. However, expenses on the actual sale (like any eBay fees) can be added to your cost basis to reduce your taxable profit.
If casual selling becomes a regular profitable occurrence, the IRS may start to consider your hobby to be a formal business. Turning your hobby into a business could make you eligible for certain business tax deductions.
You can check the IRS’s guidelines for determining when a hobby becomes a business here. If you have questions about the differences between hobby selling and business selling, TaxAct Xpert Assist℠1 is an add-on feature that allows you to connect with a tax expert and get your questions answered in real time.
Misconception 4: I will be paying tax on all items I sell, even if it’s at a loss.
The truth: Income is determined by deducting expenses from the final sale price and determining if the transaction yielded a profit or a loss. Only the profit is considered taxable income, so you won’t owe any taxes on something you sell at a loss or for less than what you paid.
We may sound like a broken record here, but for this reason, sellers should be sure to practice good bookkeeping for their taxable and nontaxable sales.
We’ll look at a nontaxable transaction this time. Imagine you bought a new bike for $1,000 last year and then sold it online for $700 this year. You collected the $700 payment for the sale through Venmo. Because you sold the bike at a loss, there would be no income to be recognized on this sale even though the transaction was reported on the 1099-K you received from Venmo.
For more information about how to report capital asset gains and losses on your tax return, check out our comprehensive guide to capital gains taxes.
While the 1099-K changes this year may be confusing for casual sellers and small businesses who have never seen this form before, we’re doing our best to keep you and other sellers informed and prepared for the next tax season.
1TaxAct Xpert Assist is available as an added service to certain users of TaxAct’s online, consumer prepared 1040 product. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. View full TaxAct Xpert Assist Terms and Conditions.
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IRS CIRCULAR 230 DISCLOSURE: Any U.S. tax advice contained in this communication is not intended to be used for the purpose of either (i) avoiding penalties that may be imposed, and (ii) supporting the promotion of any matters addressed.