4 Examples of Form 1099-K Scenarios
You can receive Form 1099-K for a variety of reasons. How you report the income listed on your 1099-K depends on how you made that income, which can be confusing if you’ve never seen this form before.
In late December 2022, the IRS delayed an anticipated change in 1099-K reporting thresholds that would have resulted in many more taxpayers receiving Form 1099-K. Due to these delayed changes, you actually may not receive a 1099-K this year — unless you were subject to backup withholding or live in a state with a lower reporting threshold.
Still, it’s good to start preparing now for next tax season! You might get a 1099-K next year if you do any of the following during the 2023 calendar year:
· Had friends or family reimburse you through a payment processor such as Venmo or PayPal
· Sold items online through sites like eBay or Facebook Marketplace
· Made hobby income from selling your creations on apps such as Etsy
· Rented out a room in your house through an app such as VRBO or Airbnb
· Sold goods at a farmers’ market as a side hustle and collected payments through an app like Square
To help put things into perspective, let’s review some more detailed examples of why you might receive a 1099-K this tax year and how to report your income accordingly.
Selling used personal items or reselling items
If you sold any personal items during the year, you typically only need to report the sale if you sold the item for more than you originally paid for it.
Let’s look at a couple of examples of a taxable sale:
Last year, you acquired an old table for $20. You restored the table, used it for a while, and then decided to sell it over a year later. You end up selling the table for $100, leaving you with an $80 gain. You collect the payment through Venmo (a third-party payment network) and Venmo sends you a 1099-K with this transaction listed among other third-party network transactions.
Since you sold the table for more than you paid for it, you would need to report the sale on your income tax return. In this example, the $80 profit you made would be a and taxed as such.
To calculate how much tax you might owe on a short- or long-term capital gain, use our Capital Gains Tax Calculator.
The same thing goes for reselling items. Say you purchased tickets for a music event through an online platform like TicketMaster. Something happens to make you unable to attend the event, so you resell the tickets online for $100 more than what you paid. You collect the payment through PayPal, and PayPal sends you a 1099-K with this transaction on it.
In this instance, you would need to report the sale on your tax return and owe income tax on the $100 profit you made.
However, most used personal items often decrease in value over time, meaning you likely sold them for less than what you paid. If you did not make a profit, you do not owe any income taxes on a sale. But because Form 1099-K shows your gross payments, non-taxable transactions may still be listed on the form.
Let’s look at an example of a non-taxable sale:
Say you purchased a TV 10 years ago for $400. After a while, you decide to upgrade to a bigger TV and sell your current one on Facebook Marketplace for $50.
Since you sold the TV at a loss, you would not need to pay taxes on this sale, even if the sale is listed on a 1099-K that you receive. You can still report the sale on your tax return, but there would be no income recognized and, therefore, no taxes owed on the sale.
Selling goods or services as a side hustle
Now let’s say you ran a side hustle selling goods for a profit, such as produce at a farmers’ market. You had multiple payment methods — in addition to cash sales, you collected debit and credit card payments from buyers through an app such as Square. When tax season rolls around, Square sends you a 1099-K with a list of all your gross receipts from these transactions.
Because you sold all your goods for a profit, the IRS treats this as business income, and you will need to pay taxes on that income.
Tax Tip: You may receive a 1099-K for all your digital transactions, but don’t forget that you also need to report any cash sales you made.
The same could be true for any freelancer or independent contractor work you do on the side. If you accepted electronic payment card transactions for your services, you’ll likely get a 1099-K from the third-party payment network (like Square in the example above).
Hobby selling
If you have a hobby such as painting or pottery and you sometimes sell your art for a profit, you will also need to report that income.
The IRS defines hobby selling as an activity that you engage in for sport or recreation with no intent to make a profit. Suppose you start selling your hobby pieces on Etsy with the intent of making a profit or start depending on your hobby selling as your livelihood. In that case, you risk the IRS classifying your hobby as a business and you as self-employed, meaning you’d have to file Schedule C.
If you’re unsure, you can read the IRS guidelines for determining if your side income is a hobby or a business.
Assuming you’re making income from your hobby, you’ll still need to report any profits you make. Hobby sale income is classified as “additional income” by the IRS. If you get a 1099-K detailing your hobby sale transactions, you can report your hobby income on Schedule 1, line 8 of Form 1040.
Unfortunately, you cannot deduct hobby expenses from your hobby income. For example, if you crochet and sell your crafts on Etsy, you would not be able to deduct the cost of the yarn to reduce your profit.
Renting out personal property
When you rent out personal property — maybe household tools, yard equipment, or even your car or a room in your home — you also need to report this income on your tax return.
For example, if you occasionally rent out some yard equipment during the summer and collect payments through an app like PayPal, you may receive a 1099-K reporting all your rental transactions.
If you aren’t in the business of renting out your personal property (you only do it occasionally and don’t run it like a business), you’d report this income much like a hobby on Schedule 1, line 8k. Unlike a hobby, you can deduct expenses related to the rental of personal property. You can do this on line 24b of Schedule 1 Form 1040.
Main takeaways
Running a side hustle, selling items as a hobby, selling used personal items, or renting out your personal property are all potential scenarios in which you might receive Form 1099-K. Though Form 1099-K can be used for multiple scenarios, you must handle your tax reporting differently depending on how you made the income.
Thankfully, TaxAct® has your back. We ask our 1099-K filers detailed questions about their 1099-K — this helps us determine how to correctly report the income. If you received Form 1099-K this year and aren’t sure what to do with it, give our intuitive tax prep software a try!
