It’s not unusual for anyone with an old desk or bicycle that’s in decent condition but no longer needed to sell it online and make some extra cash.
But because of a change in tax law, these small-time online sellers may soon receive a tax form that few have seen before, a 1099-K. The change took effect for 2022 and may be confusing, experts say, possibly leading some people to pay taxes that they don’t owe.
Millions of people could receive the forms early next year, said Christopher Walters, chief executive of Blucora, the parent company of TaxAct do-it-yourself tax software. “A lot of people are likely to be surprised,” he said.
What’s going on? In 2021, as part of the American Rescue Plan, Congress changed the rules for how online marketplaces and payment services must report transactions. The aim was to better track gig economy income that wasn’t reported to the Internal Revenue Service.
Before this year, online companies that process payments — including marketplaces like eBay and Poshmark and payment services like PayPal and Venmo — were required to send 1099-Ks only to sellers who exceeded 200 transactions and $20,000 in income annually. That threshold captured sellers running businesses, while excluding most people who were merely cleaning out their closets.
But this year, the income threshold dropped to $600, with no minimum number of transactions. If you received $600 or more for the sale of goods or services, you may receive a 1099-K in early 2023 — even if you are just an occasional online seller of used household items or clothing.
Casual users of online platforms may receive the forms even if the payments don’t reflect taxable income, said Andrew Lautz, director of federal policy with the conservative National Taxpayers Union, which supports a higher reporting threshold. Used items generally don’t result in taxable income if they are resold for less than what the seller originally paid, he said.
Say you sold a used piano on eBay for $1,000, but you paid $2,500 when you bought it new. “You don’t owe taxes,” Mr. Lautz said.
Under the new rule, however, eBay will send both you and the I.R.S. a Form 1099-K, showing you were paid $1,000. The company knows nothing about your initial purchase; it’s up to you to document the original price to show that no tax is owed. Taxpayers with normally simple tax profiles “may not know how to report this transaction” on their income tax return, the Congressional Research Service noted in a report.
The change is not meant to apply to people who are receiving payments as gifts or as reimbursements from friends after splitting the cost of a restaurant meal, said Erin Collins, the national taxpayer advocate, who heads an agency within the I.R.S. that assists taxpayers. But some people could mistakenly receive forms anyway — say, if they get payments mislabeled as business transactions rather than “friends and family” payments, she said.
“The change is going to cause confusion,” Ms. Collins said.
Mr. Walters of Blucora said he might be among taxpayers receiving a 1099-K. He likes to attend concerts, he said, but sometimes his plans change. “If I can’t make it to the concert,” he said, he sells the tickets on StubHub, which is among the online marketplaces that have alerted users to the new rules.
Here are some questions and answers about the new 1099-K rules:
What can I do to prepare for next year’s tax season?
If you use payment apps, Ms. Collins said, remind those sending you personal payments to designate transactions as such, and make a note of what the payment was for. Venmo and its parent, PayPal, allow users to designate transactions as personal or for purchases. Payments are tagged “friends and family” by default when money is sent between two consumer accounts, the company says, but users can choose the “goods and services” button when making a purchase. Only payments sent with the toggle on are tagged as goods and services for the recipient.
Cash App says on its website that users with standard, personal accounts won’t receive the forms and that only users with business accounts will have transactions reported to the I.R.S.
Sellers should gather receipts or other documents that show the original cost of items they have sold, Mr. Walters said. TaxAct has teamed up with eBay to help users understand the new requirements.
If you do get a 1099-K in January, don’t ignore it, said Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals. If you think it’s in error, you can request a correction, though that takes time and may delay you in filing a return.
If the amount isn’t taxable, you generally don’t have to report it on your return, accountants say. But make sure you have records to prove that, Mr. O’Saben said, because you may get a letter from the I.R.S. asking for documentation.
Is there a chance the new rule will be changed?
Companies including eBay, Etsy and Poshmark have created the Coalition for 1099K Fairness to protest the new rule, saying it will cause unnecessary hassles for occasional sellers who will swamp the already beleaguered I.R.S. with inquiries.
A Republican proposal would reinstate the old rules, while a proposal from Democrats would raise the threshold to $5,000. Bipartisan support for a change means it could be included in year-end tax legislation, but it’s not certain.
“I would not bank on them changing the threshold,” Mr. Lautz said.
Does Zelle fall under the new rule?
Zelle, the payment app owned by a group of big banks, does not issue 1099-Ks, said a spokeswoman, Meghan Fintland. The law requiring some payment services to report transactions doesn’t apply to Zelle, she said, because it is a bank-to-bank network and doesn’t handle “settlement” of funds. But that doesn’t mean that payments received via Zelle may not be taxable.
“It’s up to the individual to handle their tax implications,” Ms. Fintland said.