Venmo has become an essential platform for handling various financial transactions, making it easy to split bills, send money to friends, or even receive payments for your side hustle. However, as convenient as Venmo is, it's crucial to understand the IRS rules regarding taxes on Venmo transactions. In this guide, we'll delve into the IRS's treatment of Venmo transactions, taxable scenarios, and upcoming tax changes for 2024.
How the IRS Treats Venmo Transactions: When you use Venmo for personal transactions, like splitting dinner bills or receiving birthday gifts, you generally don't need to worry about taxes or IRS reporting. However, if Venmo becomes a tool for your business endeavors, you must be prepared to account for your income and pay the necessary taxes. Here are some examples to clarify:
Transactions Not Requiring Reporting:
Your friend reimburses you for a meal or an Uber ride through Venmo.
Your mom sends you a birthday gift.
Your roommate shares the rent and electric bill payments via Venmo.
Transactions Requiring Reporting:
You operate a business selling items on platforms like Etsy and accept payments through Venmo.
You offer services like dog walking or house cleaning as a side gig, with clients paying via Venmo.
You work as a freelancer and receive payments through Venmo.
You sell personal items, such as furniture, for a profit, and the buyer pays via Venmo.
Regardless of how you receive money, it's your responsibility to report your income and profits to the IRS and pay taxes on these earnings.
Tax Reporting Changes for Venmo and PayPal in 2023 and 2024: The IRS has introduced changes in tax reporting thresholds for payment apps like Venmo, PayPal, and others. Initially slated for 2022, these changes were delayed due to concerns about their impact. Here's what you need to know:
Old Reporting Thresholds for 2023 (Tax Returns Due in April 2024):
You will receive Form 1099-K from Venmo, PayPal, and similar apps if you have payment transactions for goods and services exceeding $20,000 and more than 200 transactions. (Note different thresholds apply in specific states.)
You may be subject to backup withholding if the IRS requires it due to inaccurate tax identification or previous underreported income.
New Threshold for 2024 (Tax Returns Due in 2025):
The IRS will implement a lower threshold of $5,000 for payment platforms.
How to Avoid Taxes on Venmo: If you're self-employed or conducting business on Venmo, you will likely owe taxes on your earnings. Reporting this income is essential. Here are some scenarios to consider:
Friend and Family Payments: Ensure personal payments from friends and family are correctly tagged to avoid erroneous tax reporting.
Selling Items for Less: If you sell items for less than $20,000 (or $5,000 in 2024), you may not receive a 1099-K, but you should still report your income.
Offsetting Gains and Losses: If you sell items for less than you paid, report the loss on your tax return. Consult a tax professional to navigate these situations effectively.
Frequently Asked Questions (FAQs):
Will Venmo be taxed in 2023? Venmo transactions may be subject to taxes in 2023. The IRS has delayed the implementation of new Form 1099-K reporting thresholds, but you are still responsible for reporting your income and paying taxes, even if you don't receive Form 1099-K.
What is the $600 tax rule? The $600 tax rule requires third-party payment apps to submit Form 1099-K for users earning over $600 in a tax year. This rule was initially set to affect 2022 but has been delayed. In 2024, a phased-in threshold of $5,000 will apply.
Will I owe taxes if I sold cryptocurrency using Venmo? Yes, if you sold cryptocurrency on Venmo or any other platform, your profits are subject to capital gains taxes. Consult a tax professional for guidance on managing capital gains and losses.
Are you concerned about how these IRS rules may impact your Venmo transactions? For expert advice and assistance in navigating your tax obligations, contact Done with Debt today. We're here to help you make informed financial decisions.
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