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 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, those rules now state when there is more than $600 worth of transactions in a year, the parties involved 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 receives money through these apps, it’ll get a 1099-K showing its gross income.
On the personal side, it gets a bit different. If you send money to family and friends from your account, it won’t be included or reported on a 1099-K.
The IRS provides specific examples, such as money received from:
- a friend for reimbursement
- a roommate to pay rent
- a loved one as a gift
- selling a personal item at a loss
Most apps will ask you to distinguish how payments are made, between sending money to friends and family or if they’re 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 bought a couch for $100 and sell 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.
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 they do not track transactions for standard, non-business accounts.
This means that users can make transactions without worrying about having their financial activity tracked by the platform.
However, this policy is different for business accounts.
Business accounts on Cash App are used to sell goods or services. 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 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, it can make a big difference in the way you send funds.
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.
The way Zelle operates is unique since it does not settle funds, which means it doesn’t hold or transfer money on behalf of 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 since it is only required for payment settlement entities that process certain transactions.
The main advantage of Zelle is its flexibility and adaptability to different financial systems.
Its ability to connect with different financial institutions and payment systems makes it an excellent option for businesses and individuals operating globally while offering a significant level of security and privacy for its users.
Still, Need Help? We’ve Got You Covered!
While money-transferring apps are a convenient and easy way to send money to friends, family, and businesses, it’s important to be aware of their tax consequences.
Keep records of all transactions and distinguish between personal and business accounts to ensure you comply with tax laws.
If you aren’t sure where to start, our qualified tax lawyers can offer stress-free filing to ensure you stay compliant with the IRS.