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New gig economy reporting law could create tax confusion for online sellers of personal property

Donated couch
I loved this couch, but it was starting to wear so we donated it away while it was still in good shape. Some folks, however, would have sold the sofa. Now, such transactions could trigger a confusing tax situation.

With inflation still squeezing budgets, some people have taken to selling old items. Garage sales are the traditional route, but if your neighborhood limits when you can put old items out for sale (dang those HoAs), then there's always the internet.

A tax law change, however, could mean a tax hassle for infrequent, small-time online sellers. They could get a tax form next year that they've never seen before, the 1099-K.

That's because starting this year, a provision in the American Rescue Plan Act (ARPA), signed into law on March 12, 2021, requires a stricter tracking of gig economy transactions.

And it could mean some sellers might end up paying taxes that aren't legally due.

COVID relief paid for by gig taxes: ARPA was designed to help those struggling with COVID-related financial stresses. To help cover that coronavirus relief, Congress came up with the enhanced online sales rule. The Joint Committee on Taxation (JCT) estimated this change would increase federal tax revenue by $8.4 billion from fiscal years 2021 to 2031.

The reporting limit used to apply to cases where the number of online transactions exceeded 200 and accounted for $20,000 in income annually. That threshold was dropped by ARPA to just a $600 sales trigger.

And that means online marketplaces and payment services now must report these much-lower transactions, to both the seller and the Internal Revenue Service.

The problem is that some folks who'll get a 1099-K, excerpt shown below, might not owe tax on the amount on the form.

1099-K payment card third-party network transactions 2022 form
See more tax forms and more about them at Talking Tax Forms.

But, fearing IRS questions, these sellers might count their proceeds as income anyway.

Only capital gains count: You only owe tax on assets when their sale accounts for a capital gain. Old personal items sold at flea markets, garage sales, or online usually don't fall into this category.

Or, as Ann Carrns notes in this weekend's Your Money Adviser column for the New York Times, if you sold a used piano on eBay for $1,000, but you paid $2,500 when you bought it new, you didn't make any gain on the sale. So you don't owe taxes.

Carrns has more, and more quotes from tax experts, on this law change and the confusion it might cause this coming filing season. That's why her piece "Did You Sell an Old Desk Online? You May Receive a Tax Form" earns this weekend's Saturday Shout Out.

Expected unintended tax consequences: A second shout goes out to the Congressional Research Service (CRS) report that details the change. The CRS analysis by Anthony A. Cilluffo, a public finance analyst for the Congressional public policy research institute, also notes (excerpted below) a couple of obvious unintended tax effects that Congress continually fails to grasp in writing new tax laws.

"Increasing information reporting for payment settlement entity transactions may increase tax complexity ... [for] users acting in a personal (i.e., nonbusiness) function. ... [T]he user will receive a Form 1099-K reporting ... reportable transactions, which is also reported to the IRS. Taxpayers who typically have relatively simple tax situations may not know how to report this transaction on their income tax return while also claiming the correct deduction for it." 

Possible legislative relief: Carrns and CRS also point out that several bills that could help clear up this new reporting rule's potential confusion.

The problem here is that House and Senate members have exited Washington, D.C., to campaign, and won't be back, as a lame duck Congress, until after the midterm elections.

If you're facing a 1099-K for a nontaxable sale, you should do two things now.

First, let your Senators and Representatives know that you want this law changed.

Second, have records handy to show that you don't owe tax on the amount you got for that old bookshelf.

You also might find these items of interest:







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We are experts in resolving HMRC enquiries and tax investigations for our clients. We can help you respond to any general HMRC enquiry, ensuring that your matter will be handled with care and consideration while still meeting all its requirements.
There is a procedure in place for individuals and companies who HMRC suspects of committing fraud. It can be an incredibly stressful time if you happen to get caught up with this investigation process. However, you must trust your advisers at this point to preserve any legal right that may exist.
Tax authorities have a variety of ways they can investigate taxpayers. One type is the general inquiry, which usually doesn’t result in imposing fines or charges unless there’s evidence to suggest that an individual has been evading taxes for several years and committed fraud through their claimed earnings on returns.


Who has records for that 'old bookshelf'. I see what those new 87k IRS agents are going to be busy doing. Nailing grandma for selling her old quilts on etsy or grandpa for trying to raise enough cash to put fuel in his truck. The IRS and ebay don't care that you're selling items at a loss. They hope you get scared and just pay tax on the entire amount.

Got to love government overreach.

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