Selling items online is a great way to earn extra cash or clear out your closet or garage this holiday season. Etsy, eBay, Mercari, Tradesy, and Poshmark are some of the websites that people, women especially, use to resell pre-owned items.
However, casual online sellers are in for a big surprise from Uncle Sam in 2023. Selling items on these websites and others could trigger new tax reporting requirements instituted by Congress and possibly even a tax bill.
Either way, we can expect a new layer of confusion and frustration as Americans figure out what to do with the IRS form 1099-K when they file their 2022 tax returns next year.
Up until 2022, most people selling items on online marketplaces never had to think about the tax implications of their sales because what they sold never hit the five-figure reporting threshold. This is also true for people engaged in gig work (i.e., independent contractors) who get paid through cash apps such as Venmo.
However, to pay for President Biden’s inflationary nearly $2 trillion American Rescue Plan in 2021, a Democratic-led Congress enacted changes to the tax reporting threshold on IRS form 1099-K to capture more online transactions and more tax money.
Previously, an online seller would only be required to file form 1099-K if he or she made at least 200 transactions totaling $20,000 or more.
There is no transaction limit now and selling as little as $600 will trigger the reporting requirement.
The scope of how many Americans may be affected by this new 1099-K reporting requirement could be immense. According to Pew Research, about one in four Americans has made money by selling something online, renting their home or using a digital platform to take on work in 2016. Given pandemic shifts to flexible work and the continued rise in independent contracting, that number is likely higher.
What can taxpayers do?
Two things taxpayers should do:
Don’t file early. Wait until later in tax filing season once all reporting paperwork arrives. The IRS advised taxpayers last week:
The IRS cautions people in this category who may be receiving a Form 1099 for the first time–especially ‘early filers’ who typically file a tax return during the month of January or early February–to be careful and make sure they have all of their key income documents before submitting a tax return.
Gather your paperwork now. Tax professionals advise taxpayers starting early in aggregating all of their receipts:
If you’re an online seller and you’re buying supplies or even driving your car to pick up items or ship items out, you should keep track of those [expenses],” Lisa Greene-Lewis, a CPA at TurboTax, told CBS MoneyWatch earlier this year. “They are deductible if they’re related to your business.”
Congress must fix this issue
Congress did this, and Congress can fix it.
A Democratic-led Congress enacted this tax reporting change. Recent legislation to beef up IRS ranks by 87,000 agents most certainly means that liberals in Congress want to ramp up enforcement and squeeze low and middle-income households.
Thankfully, there is bipartisan agreement that the reporting threshold is too low. Congress can enact any of several bills that have been introduced to either reinstate the original $20,000 threshold or to raise the threshold higher to $5,000.
Whatever route Congres takes, this is their issue to fix to avoid the headache and potential financial hardship this new 1099-K reporting requirement will trigger.