Tax Reporting Changes in the Pipeline for Online Sellers and Services
With the evolving digital marketplace, it is not uncommon for people to make money selling goods and services. While some people make a side hustle out of the process, others bring in a substantial income selling online. The IRS now wants to know a little bit more about your profits from eBay or Etsy sales.
In many parts of the country, individuals typically only receive a 1099-K tax form if they make $20,000 or more from at least 200 transactions. Going into effect this year, 2022, people will need to report any earnings over $600, regardless of the number of transactions.
The new rule comes from a provision in the American Rescue Plan Act. While the reporting rule may come as a shock to many Americans, some states already require reporting for $600 earnings. One thing to keep in mind is reporting does not automatically mean taxable income. In some situations, you will not need to pay taxes. The rule is intended to improve accountability standards across the board.
The new reporting law will affect all platforms that allow individuals to sell goods or services, including Etsy, Uber, eBay, etc. EBay and other platforms feel the law is too broad and could potentially alienate sellers and drive away business.
Because of the new law, individuals wishing to sell goods or services on these platforms will need to supply their social security numbers and other personal information. Many platforms feel like this requirement could turn off potential sellers, driving away business. Most platforms like eBay have never required the type of personal information they will now be legally required to obtain.
The IRS argues the new law is a means to an end. Too many people have been gaming the lax reporting laws for many years, resulting in a tax gap of more than $380 billion per year. Regardless of whether a tax form was automatically delivered or not, there have been many instances of people neglecting to report earnings from online platforms.
The new law will take time to assess and get used to, but for now, the general understanding is that if you sell to make a profit, the sold items count toward your taxable income. For instance, if you routinely purchase clothes from yard sales, thrift stores, or other locations intending to sell the products for an increased price, that is taxable, and earnings should be reported.
However, if you use sites like eBay more like garage or yard sales, selling items you already own for less than you originally paid, you may not have to report that income. Typically, yard sales are not designed to earn a profit, meaning goods are actually sold at a loss.
Before deciding what is and is not taxable, talk to a CPA. Tax laws are usually complex, and it is easy to get into hot water when making assumptions, especially when dealing with new regulations.
The new law will create trouble for some sellers because, depending on their earnings, they might become self-employed, resulting in higher taxes. However, there can be benefits to self-employment status.
The overall point is that the new tax law will change how selling platforms operate. If you currently make money off these platforms, you might want to talk with an accountant about how the new law will affect you.
What do you think of the changes coming to platforms like eBay and Etsy? Comment below.