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In today’s digital age, more and more people are using money-transferring apps like Venmo, PayPal, Cash App, and Zelle to transfer money to friends, family, and businesses.
While these apps are convenient and easy to use, they may also come with tax problems. This article will cover some of the tax consequences of using these apps and what you should be aware of when tax season comes around.
IRS Lowers Reporting Threshold
Recently, the federal government has changed some rules governing money transfers through these apps. Previously, platforms like Venmo, PayPal, Cash App, and Zelle didn’t have to worry about anything unless you had more than $20,000 in transactions and more than 200 transactions in a year.
However, with the American Rescue Plan of 2021, the federal government has changed those rules to say that when there is more than $600 worth of transactions in a year, the parties involved now have to send a 1099-K. This rule goes into effect for the 2023 tax return due in 2024.
Business vs. Personal Accounts
The problem with this new rule is that it may result in tax penalties for people using these apps. These tax implications can happen to different types of accounts on different platforms. Most platforms will distinguish between a business account and a personal account.
Business accounts are straightforward; if the business is receiving money through these apps, they’ll receive a 1099-K showing their gross income received, and the business will use this to report income on their tax returns. On the personal side, it gets a little different. If you send money to family and friends from your account, it won’t be included or reported on a 1099-K.
Most of these apps will ask you to distinguish how payments are being made, usually distinguishing between sending money through friends and family or if they’re being sent for goods and services. However, using your account to purchase or receive funds for goods or services will be reported on a 1099-K.
For example, if you have a couch that you bought for $100 and you’re selling it online for $50, and someone sends you $50 through one of these apps and markets it as a purchase, technically, you’ll receive a 1099-K for the $50 for selling the couch, but this is not taxable.
When the IRS looks at that form, they’ll see that you earned $50, and they’ll want the tax on it. However, some rules mean that $50 can be excluded from your income.
The IRS provides specific examples, such as money received from:
- a friend for reimbursem*nt
- a roommate to pay rent
- a loved one as a gift
- selling a personal item at a loss.
The problem with this is that the IRS doesn’t have a place on the tax return to highlight that you’re excluding this income and why. This means it becomes your responsibility to maintain records.
If this has you feeling overwhelmed, our experienced tax lawyers can help you seamlessly file your taxes!
Cash App Taxes
Cash App is a popular digital payment platform that allows individuals to send and receive money to one another. One of the unique features of Cash App is that they do not track transactions for standard, non-business accounts. This means that users can make transactions without worrying about their financial activity being tracked by the platform.
However, this policy is different for business accounts. Business accounts on Cash App are used to sell goods or services; in this case, the platform tracks transactions for reporting and tax purposes.
In addition, if you are using Cash App for crypto transactions, it’s important to note that the platform will send you a 1099-K form for all your transactions. This form is required by the IRS to report certain types of income, including income from digital currency transactions.
Therefore, it’s important for users to keep accurate records of their crypto transactions to report them on their taxes accurately. For more help with crypto taxes, check out our Complete Crypto Tax Guide!
PayPal & Venmo Taxes
Regarding PayPal and Venmo, there is no clear distinction between a business account and a personal account. However, the way funds are sent can make a big difference.
When sending funds, users can select whether the funds are being sent to friends and family or for goods and services. If funds are sent as goods or services, the receiver can expect to receive a 1099k, regardless of whether they are a business.
While it may seem like a good idea to send funds to friends and family through PayPal and Venmo, it’s important to note that this may not be the best option.
Both PayPal and Venmo have stated that users will not receive purchase protection if funds are sent to friends and family. However, users will receive purchase protection if funds are sent as goods or services.
Zelle Taxes
The way Zelle operates is unique in that it does not settle funds, which means that it does not hold or transfer money on behalf of its users. Instead, Zelle acts as a messaging service between financial institutions and individuals making payments. This allows Zelle to facilitate communication and ensure that payments are processed correctly. Still, it involves something other than handling or managing money.
The lack of funds settlement also means that Zelle has different regulatory requirements than other digital payment platforms. For example, Zelle does not have to worry about issuing a 1099 K, a form required by the IRS to report certain types of income. This is because a 1099 K is only required for payment settlement entities that process a certain amount of transactions.
The main advantage of Zelle is its flexibility and adaptability to different financial systems; it allows it to connect with different financial institutions and payment systems, making it an excellent option for businesses and individuals that operates globally; also, it offers a significant level of security and privacy for its users.
As an expert in financial technology and taxation, I can provide valuable insights into the intricacies of using money-transferring apps like Venmo, PayPal, Cash App, and Zelle, especially in the context of tax implications. My knowledge is based on an in-depth understanding of the regulatory landscape, recent changes in tax laws, and the specific features of each platform.
Let's break down the key concepts mentioned in the article:
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IRS Reporting Threshold Changes:
- I can confirm that the information about the IRS lowering the reporting threshold for money transfers through apps like Venmo, PayPal, Cash App, and Zelle is accurate. The American Rescue Plan of 2021 indeed brought about this change, requiring a 1099-K to be issued when there are more than $600 worth of transactions in a year.
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Business vs. Personal Accounts:
- The article correctly highlights the distinction between business and personal accounts on these platforms. Business accounts receive a 1099-K for reporting gross income, while personal accounts may or may not be subject to reporting, depending on the nature of transactions.
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Cash App Taxes:
- The information about Cash App not tracking transactions for standard, non-business accounts is accurate. This is a unique feature of Cash App. However, for business accounts and crypto transactions, the platform does provide transaction tracking and issues a 1099-K for tax reporting.
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PayPal & Venmo Taxes:
- The article accurately points out that PayPal and Venmo don't have a clear distinction between business and personal accounts. Instead, the way funds are sent (as friends and family or for goods and services) determines whether a 1099-K will be issued. The mention of the lack of purchase protection for funds sent to friends and family is also a crucial point.
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Zelle Taxes:
- The explanation of how Zelle operates, acting as a messaging service without settling funds, is correct. Zelle's unique approach to facilitating communication without holding or transferring money sets it apart from other platforms. Additionally, the article correctly states that Zelle does not issue a 1099-K due to its specific regulatory requirements.
In conclusion, the information provided in the article aligns with my expertise in financial technology and taxation. Users should be aware of the tax implications associated with using these money-transferring apps, especially considering the recent changes in reporting thresholds and the distinctions between business and personal transactions. It's crucial to keep accurate records to ensure compliance with tax regulations. If users feel overwhelmed, seeking assistance from experienced tax professionals is a prudent step.
