This is - best as I can figure - accurate as of 1/2/2022. They’re talking about adding new forms or new places on the old forms to accommodate the different money that could be reported on a 1099-K but they ain’t come out w/ ‘em yet and probably won’t till it’s closer to the end of the year 2022.
Everything in here is subject to change.
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The new limit on Paypal, Venmo, CashApp, Zelle, etc, where if $600 goes through their sites, they'll have to send you a 1099-K and you'll be expected by the IRS to tell them where that money came from, is for ANY money. Gifts, sales, money that comes from selling a $2500 lawnmower on ebay for $600 (incurring a $1900 loss), that amount all gets added up and stuck on the 1099-K.
What is a 1099-K? It’s informational, telling everyone about what all went through their servers. It is a way for them to say “Hey, this amount of money went through our things. They need to be filing taxes on some of it, IRS. We just had to let you know.”
Gifts (unless they're an insane amount) and sales at a loss are generally not necessary to report to the IRS. However, since you're getting a 1099-K, the IRS will now expect you to tell them where this money came from.
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So let’s say your 1099-K included the following:
$100 - Gift
$600 - Lawnmower sale from above
$1,200 - Commission money made from art
Your 1099-K would be for $1,900.
The only amount that's actually taxable per the IRS is the commission money, that $1,200.
Where you report the $1,200 depends on what sort of activity your art-making is.
If your art is A HOBBY, you fill the income from your 1099-K that you receive from Paypal or whoever on Schedule 1, Form 1040, line 8, "Other income” with the explanation of “income from hobby.”
You are NOT allowed to claim any kind of expenses or deductions from this sort of income post-2018. So if you spent $300 for supplies for your knitting, and sold two sweaters for a total of $300, breaking even, the IRS doesn’t care. You’ll have to report the income from this as $300.
If your art IS A BUSINESS, you file the income on a Schedule C as a business entity. You'll be subjected to self-employment taxes but have the opportunity to write off deductions, such as if you had to buy a new tablet, a PORTION of your bills that are RELEVANT to the business, and other things.
IS IT A HOBBY OR A BUSINESS?
Do you conduct it in a businesslike manner, and maintain accurate books and records?
Do you have personal motives in carrying on in the activity?
Do you intend to make it profitable?
Do you depend on the income for your livlihood?
Are your losses due to circumstances beyond your control (or are theynormal in the startup phase of your type of business)?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you been successful in making a profit in similar activities in the past?
Has it made a profit for years, and how much profit does it make?
Do you expect to make a future profit from the appreciation of assets used in the activity?
The IRS cares most about if you've consistently been shown to make profits from the hobby for the last 3 to 5 years. At that point they’d consider it more of a business than a hobby.
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So we know where to report the $1,200 for the art. What about the other $700 from the gift and lawnmower sale?
You absolutely should tell the IRS about this other money. If you don’t, they’ll automatically send you a thing asking for an explanation for it.
I would report this amount on Schedule 1, Form 1040, line 8, “Other Income”. If your art sales went here, then the explanation could be “Income from hobby + gifts and yard sales.”
Down below it, you could put an Adjustment to Income, 24-Z, in the amount of $700, and list what it’s for. “Other money from 1099-K, not taxable / gifts and yard sale at a loss” or something similar. Alternatively, you could attach an explanation to your tax return.
As long as it seems reasonable, the IRS likely won’t bother you with it. The main thing is that you just let them know somewhere what is up with this money.
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Keep records of everything beginning from now on. Anything that goes into your accounts with any of these third party money movers, make notes for it. That $60 your sister repaid you through Zelle for taking her family out to eat the other day. That $100 you were CashApp’d at a yard sale, reselling your Twisted Fate League of Legends statue you bought at $250 4 years ago. That $30 you got from doing a headshot of a male Viera when they paid their Paypal invoice.
Just in case they ask you to prove anything from these 1099-Ks from now on. They love extensive documentation.
