What is a 1099-K and how to handle it when it arrives

Photo by Kelly Sikkema on Unsplash

There's an old tax form that's showing up unexpectedly at many new houses this year. Missing it could set you up for a nasty tax surprise, and next year, even more households should be looking for it. I'm talking about the 1099-K tax form, and the definition of who gets this form has expanded over the last few years. 

‍What is a 1099-K?

The tax form "1099" probably rings a bell. 1099 forms are used to report various types of income, and there are different versions of the form for different types of accounts. You probably get a 1099-INT for your high-yield savings account. Your brokerage firm sends you a 1099-B with gains and losses from investment transactions. If you did contract work, you should get a 1099-NEC (short for Non-Employee Contractor). 

‍The 1099-K is specific to payments collected from payment apps like Venmo or Paypal, credit card transactions, and payments via online marketplaces like eBay or Facebook Marketplace (which uses PayPal for transactions that happen on the platform). I even receive one for payments from clients for financial planning services via the payment processor AdvicePay. 

‍Why now? I've sold things before and never received this in the past.

Previously, only sellers with over $20,000 in gross sales received from 1099-K. Of note, this didn't necessarily mean that sellers with sales under $20,000 didn't have to report their profits, but no specific tax information was sent to the IRS. That changed with the post-pandemic passage of the American Rescue Plan Act in 2021. Mixed in with a long list of provisions was a substantial reduction to the amount that triggers a 1099-K to be sent to the taxpayer and, importantly, to the IRS as well. It was such a dramatic reduction the implementation had to be delayed a year to allow everyone to get organized and ready for the updated reporting. 

So, what are the new thresholds? For 2024 (of which tax forms should be on their way by the end of January 2025), the threshold was dropped to $5,000. Hold on to your hat, though; for 2025, that threshold drops to $2,500, and for 2026 and beyond, just $600 of sales will generate a 1099-K. 

Hopefully, you have already been reporting your profits if you have any kind of side hustle, online business, resale business, etc. Again, what's new here is not the requirement to report. What's different is that your transactions are now more likely to be reported to the IRS. So, if, for any reason, you haven't been reporting the income from your sales of vintage action figures, now is the time to get serious. 

‍What about my garage sale, my used gym equipment, and splitting that Uber? 

I have deliberately used the word "profits" in this blog because, ultimately, profit - or gain from a sale - is what's taxable. But what if you sold used items and received payment through Venmo, PayPal, or other marketplaces? (I would generally recommend cash for in-person transactions where possible to avoid the risk of falling victim to a payment scam.)

‍Items sold at a loss are one of the items that won't lead to additional tax. Like selling a stock at a loss, selling that exercise bike turned coat rack for less than you paid for it will be a loss and won't be taxable. In fact, it can offset gains on sales of other personal items - but it cannot generate losses elsewhere on your tax return. The problem here is that your 1099-K won't show the cost of the item (known in tax parlance as the "basis") and won't show the fact that it was sold at a loss. If you don't properly report this on your taxes and just mindlessly report the figure on the 1099-K, you could pay taxes on income that didn't need to be taxed. So, keep an inventory of your "basis" for personal items sold to document items sold at a loss. When that reporting threshold drops to $600, there is a good chance that moving sale will generate enough money that you'll need to account for this when reporting. 

Similarly, personal transactions, like splitting a meal or a rideshare with a friend, are also not reportable. The IRS advises marking these kinds of transactions as personal where possible in the payment app and contacting the issuer of the 1099 for a correction if you received a form in error. 

‍Final 1099-K reminders

To recap, more and more of us will receive 1099-K forms in the future reporting gross income from the sale of various products. This includes the person with the small online business selling $5,000/year of merchandise, the side hustler selling a few custom art pieces at $200 each, and the ambitious reseller turning over a few vintage pieces of furniture a year. 

• Be on the lookout for 1099-K forms from anyone who collects payment on your behalf. 
• Don't just quickly report the number on the form. Be sure to include the cost of items to offset the sales proceeds where possible, reducing or eliminating your tax liability. 
• Make sure gifts and reimbursements between family and friends are not reported.
• If you're not sure, get help. Work with a competent tax professional to ensure your income or lack thereof, is reported correctly. 

Best of luck with all your side gigs and happy tax filing!