Goods, Services and You: Get Ready for New IRS Reporting Rules in 2024

Millions of taxpayers who generate income via online platforms may be receiving Form 1099-K for the first time.

The IRS Form 1099-K reporting requirements have caused significant confusion — for taxpayers who perform freelance work, those who sell goods on platforms like Etsy, StubHub and eBay, and even those who use Venmo and PayPal to transfer and receive funds. 

The platforms that have the actual obligation to transfer funds between parties are known as third-party settlement organizations. The American Rescue Plan Act of 2021 made major changes to the tax reporting threshold that is relevant for Form 1099-K purposes — meaning that millions of taxpayers who provide goods and services via online platforms may be receiving these forms for the very first time. 

As recent IRS relief begins to expire, the likelihood that clients are going to have questions increases. Advisors should pay close attention to rolling guidance on various issues faced by clients receiving Forms 1099-K.

1099-K Reporting Changes

Beginning in 2023, the Form 1099-K reporting threshold for businesses that use third-party payment services, such as Venmo, Etsy, StubHub and Airbnb, was set to decrease significantly, from $20,000 to $600. Many argued that this significant change would mean that even people whose online sales are relatively rare or who don’t have tax obligations for the year would receive these forms.

In response, the IRS issued Notice 2023-74 and delayed the effective date for the decreased reporting threshold for another year — meaning that, absent further relief, the change is now effective beginning in 2024. 

However, the IRS will begin to phase-in the lowered threshold starting in 2024, with a $5,000 threshold for the 2024 tax year (for taxpayers preparing their 2023 returns, 2023 will simply be treated as another transition year). 

The 2021 legislation also removed the de minimis threshold that previously allowed an exception to filing Form 1099-K. In prior years, Form 1099-K was required to be issued for third-party network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. (For 2023, the exception continued to apply.)

Form 1099-K: The Basics

Form 1099-K is used to report transactions that taxpayers execute via third-party payment systems when the amount involved is more than $600. The form is sent to both the taxpayer and the IRS.

The amounts reported on Form 1099-K include only payments received for goods or services. The form does not include adjustments for fees, discounts, shipping or refunds. Those amounts are not “income” in the eyes of the IRS but can be deducted from the amounts reported on Form 1099-K when the tax return is filed.

Clients who use sites like Venmo and PayPal to transfer funds for personal purposes should not see those amounts reported on Form 1099-K. However, that does make it important to carefully review the information contained on the form. If the amounts reported do not match the taxpayer’s records, the taxpayer can contact the third-party provider and request a corrected form.

While it’s important for taxpayers to understand the changing law governing Form 1099-K issuance, it’s also important for them to remember that the IRS expects taxpayers to report all income regardless of whether they receive a Form 1099-K. Even if clients do not cross the applicable threshold, they are still responsible for reporting income earned through online sales and side hustles.

Sale of Personal Items

One particularly confusing area involves situations in which taxpayers sell personal items online via platforms like eBay and Poshmark. In prior years, the $20,000 threshold was high enough that most of these online sellers didn’t receive Forms 1099-K.

However, with the decreased thresholds, these taxpayers may now see sale proceeds reported on Form 1099-K. When taxpayers sell used personal goods, they’re taxed only if they sell them at a profit. Taxpayers generally determine gain or loss by subtracting the sale price from the amount they paid for the item.

Gain on the sale of items that were previously held for personal use is taxable. However, losses are not deductible. These transactions must be reported on Form 8949, Sales and Other Dispositions of Capital Assets, and Form 1040, U.S. Individual Income Tax Return, Schedule D, Capital Gains and Losses.

The IRS has directed taxpayers who sold personal items at a loss to make offsetting entries on Form 1040, Schedule 1, Additional Income and Adjustments to Income, by: 

Conclusion

Millions of taxpayers who have never received a Form 1099-K are likely to begin receiving these forms in 2024 and subsequent years. The IRS is releasing guidance and examples on a rolling basis to help these taxpayers understand their reporting obligations — and advisors should pay close attention to the details.

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