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The IRS is delaying a new rule that could affect people who sell items online. Here’s what it means for you.
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As part of the American Rescue Plan (ARP), the threshold for reporting income from third-party settlement platforms is set to change dramatically. Previously, such income was only reported to the IRS if it exceeded $20,000 for the year and took place in more than 200 transactions. The thinking behind this was that if a business you own was being paid for goods or services online, it would trigger tax reporting to the IRS.
Under the new rules, the reporting threshold is falling to just $600. In other words, if you sell concert tickets online and receive $700, you (and the IRS) would receive a tax form reporting the sale.
This also applies to third-party payment platforms like PayPal, Venmo, and Cash App. However, it’s important to note that only transactions that result from the sale of goods or services will count. For example, if someone sent you $100 for your birthday through Venmo, that wouldn’t count toward the $600 threshold.
A welcome delay in the tax change
Until recently, it was believed that the new $600 reporting threshold would apply to payments on third-party settlement organizations for 2023 tax returns. In other words, many people thought they were just a couple of months away from receiving tax documentation for their ticket sales or other payments received. And it’s worth noting that this had already been delayed once. The new reporting rule was originally set to begin in 2022.
Now, the IRS has confirmed that the implementation of the new rule will be delayed, with the $600 reporting requirement not going into effect until 2025. Here’s what will happen over the next three years:
2023: The reporting requirement will only apply to the sale of goods or services involving over 200 transactions and more than $20,000. This is the threshold that has been in place for years.2024: The reporting threshold will fall to $5,000 to help phase in the new rule.2025: The $600 reporting threshold will take effect. Any payments for goods and services over this amount will trigger a 1099-K tax form.
There are a few reasons for the delay. One big reason is that it is difficult to determine which transactions should count. Clearly, if you sell a product you made or are running a ticket resale business, it should count on your business tax return. And on the other hand, if you receive a birthday gift, it shouldn’t. But there’s a lot of middle ground.
Let’s say that you buy a new refrigerator and decide to sell your old one (which wouldn’t be taxable, since you’re likely selling it for less than you originally paid). And it’s situations like this where the IRS doesn’t want to unnecessarily complicate taxpayers’ documentation.
Will the $600 threshold actually happen in 2025?
As a final thought, it’s important to mention that there’s no guarantee that the full phase-in of the $600 reporting threshold will happen in 2025.
It’s difficult to overstate just how unpopular of a rule change this is among casual online sellers. While it would certainly allow the IRS to collect income tax from more people who sell goods and services online as a side business, it would also have the unintended consequences of creating tax headaches for people who simply sell a few of their event tickets or occasionally receive payments for selling items, but who are definitely not running a business.
The point is that the news of the rule’s delay is certainly a welcome announcement, but it’s also important to remember that there’s a lot that can happen between now and 2025, so it’s important for people who might be affected by the new reporting requirements to keep up with the latest developments.
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