What is the new rule?
The American Rescue Plan of 2021 requires third-party settlement organizations and credit card companies — including payment apps — to report payments for goods and services if they exceed $600 per year.
What that means is if you sell handmade jewelry, art or home décor on Etsy and your transactions total $600 or more in 2023, Etsy will send you a 1099-K form that you should use to report your income to the IRS.
The same rule applies if you sell any personal items online like a car, refrigerator, furniture, stereo or even clothes — and your transactions for the year add up to $600 or more.
And keep in mind that if you sell personal items for more than what you originally paid, that's what's known as a capital gain — and you'll face taxes on it. You should report this income on IRS form 8949, schedule D and via your 1099-K if you meet the IRS's threshold.
However, if you make a loss on the sale of a personal item — like say you bought a coat for $300 and later sold it on Poshmark for $200 — that loss isn't deductible. If you receive a 1099-K for loss-making transactions, the IRS says you should make offsetting entries on form 1040.
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The Coalition for 1099-K Fairness, a group of online marketplaces opposing the new rule, believes the new $600 rule is “unfair,” burdensome and confusing for the many casual sellers and gig economy workers across the country.
“Millions of Americans have sold an item online, and many of these sellers use those funds for critical needs such as food, medicine and bills and are not running a business,” the coalition argues.
The $600 rule was originally planned for introduction on Jan. 1, 2022, but the IRS announced an eleventh-hour delay — pushing implementation back by one year “to help smooth the transition and ensure clarity for taxpayers, tax professionals and industry.”
This came after certain politicians and groups like the Coalition for 1099-K Fairness called for the rule change to be scrapped and for “common-sense tax regulations to govern the resale market.”
In January, Rep. Carol Miller re-introduced the Saving Gig Economy Taxpayers Act with the initial support of 13 Republican colleagues to reverse the “unwarranted and unfair” lowering of the 1099-K reporting threshold. As of mid-May, 41 Republican co-sponsors had signed their support of the bill.
“An American getting rid of old exercise equipment from his garage online now qualifies as a salesman of workout equipment, a teenager babysitting the neighbors’ kids is in the childcare business, and roommates who split rent are now property managers, and are all eligible to be taxed by the IRS,” she said when introducing her counter-legislation.
“The Saving Gig Economy Taxpayers Act will protect Americans who use online payment platforms, gig economy workers and small e-commerce sellers from being taken advantage of and will ensure they continue to have access to reliable income streams.”
On May 18, U.S. Senators Sherrod Brown of Ohio and Bill Cassidy of Louisiana introduced bipartisan legislation, aimed at increasing the sales threshold in the new law from $600 to $10,000, called the Red Tape Reduction Act.
Tax prep tips
The 1099-K tax law change has ticked off online sellers — to the point that 69% of people surveyed who sold goods online in 2021 said the new rule would deter them from doing so, according to the coalition's 2022 survey of online sellers.
“If you sell your ticket on Ticketmaster now, you’ll receive a 1099-K form if the amount is over $600 which is bull—-... I pay taxes when I buy the damn ticket and now I have to pay taxes when I sell the ticket,” one Twitter user vented in a series of tweets.
This $600 rule shouldn’t stop you from earning a little extra cash by selling items online, as long as you keep records of all your transactions, including original receipts and how much you sold your items for.
You should also keep track of any fees you pay to the online marketplace, as well as any shipping costs and bank fees. If you’re selling handmade crafts or services, you should record the cost of your materials, equipment and work space as these expenses can be subtracted from your net profit.
If you receive a 1099-K for the first time, the last thing you want to do is overpay on your taxes.
If you’re not sure how to report your income on the 1099-K form, you can get help from a tax prep professional or financial planner who can guide you through the process.
Most online marketplaces have also issued 1099-K advice to help you understand the new rules and the IRS has published some helpful tips.
Finally, using tax software can also help to ease your tax filing burden and help you take advantage of all the tax credits and money-saving opportunities available to you.
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