The IRS is once again delaying the requirement for a third party settlement organization (“TPSO”) to issue a Form 1099-K to anyone who received more than $600 from the TPSO in third party payment network transactions. This change, which was supposed to become effective for tax years ending after January 1, 2022, would have been significant because the current minimum threshold for issuing Form 1099-K is $20,000 and is conditioned on the participating payee having at least 200 transactions with the TPSO. Due to the IRS’ decision to delay implementation, the $20,000/200 transaction threshold remains in place for the upcoming filing season (i.e., tax years ending on December 31, 2023).
Before the IRS decided to delay implementation, there was concern that many individuals would be caught off guard by the receipt of Form 1099-Ks and, as such, fail to properly account for the underlying transactions. This is because a third party payment network is broadly defined to include an online marketplace, auction site, car sharing platform or ticket exchange on which items are posted for sale by unrelated parties that can be purchased by members of the public. A third-party payment app that is used to transfer funds from a buyer to a seller for goods may also be considered a third party payment network. This is true even if the provider of the payment app (i.e., the TPSO) did nothing else to facilitate the underlying transaction. Other platforms frequently used that would likely be considered third party payment networks include digital wallets and crowdfunding platforms.
To illustrate, let’s suppose an individual posts concert tickets for sale on a TPSO’s platform, which results in these tickets being purchased. Upon the tickets being purchased, the TPSO operates as the intermediary between the buyer and the seller by collecting payment from the buyer and then, after subtracting fees, transferring the balance of the payment to the seller. If the gross amount of this transaction along with any other transactions that the TPSO facilitates for the seller exceeded $600 for the tax year, then, in the absence of the IRS having delayed implementation, the TPSO would have been required to report the gross receipts to the IRS on a Form 1099-K and issue a copy to the seller.
Although TPSOs are only required to issue Form 1099-Ks for the upcoming filing season if the $20,000/200 transaction threshold is met, the possibility exists that some TPSOs may voluntarily issue Form 1099-Ks to those falling below the threshold.
Recipients of Form 1099-K must properly account for the transactions underlying the gross receipts reported on Form 1099-K on their respective tax returns. Properly accounting for a transaction that relates to the sale of an item of property by an individual that was held for personal use or for investment purposes would include reporting the gross receipts attributable to the item along with the item’s acquisition date, selling date and basis. If the item’s basis was greater than the gross proceeds, then no tax would be due on the transaction. If the item’s basis was less than the gross proceeds, then the difference would be taxed as a short-term or long-term capital gain, depending on the holding period of the item prior to sale.
Failure to account for any portion of the gross proceeds reported on a Form 1099-K is expected to result in the IRS issuing an unreported income notice, which may ultimately lead to the IRS assessing additional tax that is attributable to the underreported gross proceeds without adjusting for the bases of the item(s) sold. Interest and penalties may also be assessed. Therefore, it would be in the best interest of the recipients of one or more Form 1099-Ks to properly account for the gross receipts on their respective returns.