Do I need to report income from third-party electronic wallets like Venmo, Cash App, or PayPal for tax purposes?

In 2006, the IRS identified that up to $450 billion in taxes were underestimated, which corresponded to a 17% non-compliance rate among taxpayers. In response, the IRS pushed for increased third-party information reporting. The Housing and Economic Recovery Act of 2008 introduced new requirements for banks and credit card companies to report payments to the IRS. These requirements took effect in 2011, and the 1099-K form was first issued in 2012. This form relies on third-party information reporting (from banks and credit card companies) to increase tax compliance and enhance the IRS’s tax assessments. The new requirements significantly boosted tax compliance among inde

pendent contractors, especially as the so-called "1099 economy" expanded.

Under the American Rescue Plan of 2021, all payment platforms like Venmo, PayPal, and Cash App are required to report to the IRS. The IRS mandated that these payment platforms issue a 1099-K tax form to individuals who earn more than $600 in a tax year, with this requirement initially set to take effect for the 2022 tax year.

As of today, November 21, 2023, the IRS has announced a delay in the implementation of the $600 reporting threshold. This means that, similar to previous years:

• For the 2023 tax year, users will only receive a 1099-K form if they have more than 200 transactions AND earn over $20,000 through payment apps.

• For the 2024 tax year, the threshold will be raised to $5,000. If you receive more than $5,000 through payment apps in 2024, the IRS will require the payment platform to issue you a 1099-K form. The IRS’s decision to raise the threshold to $5,000 in 2024 suggests that the $600 reporting requirement might be implemented in future years.

However, you don't have to worry to much:

The IRS states that the 1099-K reporting requirement does not apply to personal transactions, such as receiving birthday or holiday gifts, collecting shared expenses for car rides or meals, or receiving household bill payments. These funds are not taxable income and should not be included on a 1099-K form.

Only transactions considered as "goods sales" and "service income" are counted on the 1099-K form. However, there is some confusion about transactions involving the sale of personal items, such as clothing or furniture. The complexity of distinguishing these types of transactions is one of the reasons the IRS decided to delay the reporting requirement.

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In this ever-changing financial environment, we are pleased to share insights and information about tax and accounting with you. Please note that the information in the article above is for reference only and may change based on evolving tax regulations. Stay updated with us, and let's move forward together!