How do I handle a 1099-K from PayPal with several different items in it (including non-taxable)?

[drewcrawford03]

It's supposed to be >20,000 AND 200 or more transactions.

So by the actual language from the IRS, I should NOT have received one. 

[RJDPA]

Ok, I'm a little confused.  I've seen 3 different answers to the same question now.  One answer says that it gets entered under miscellaneous income, other taxable income with a description of "Personal 1099K", and this answer says it gets entered as an actual 1099K then backed out in other taxable income, which is the way I had it done but then deleted it when I read the other answer.

[JamesG1]

This is complicated.  Confusion is to be expected.  This is a complex task to report correct information accurately and completely.  These thoughts guide us in giving suggestions.

• You want to report 1099-K income because the IRS is expecting to see the income reported on your Federal 1040 tax return.
• You should document fully what and why you are reporting what you report should a taxing authority ask questions several years later.
• You should only report the correct amount of income regardless of what is reported on the 1099-K forms.  However, to accomplish this, you may have to 'reverse' an entry (or a portion of an entry) to accomplish this task.  For instance, you sold something for $100 but paid $20 for the item = $80 profit. You should pay tax on the $80 profit not the $100 gross income.

How you accomplish all of this depends upon what kind of income is being reported on the 1099-K form.  The steps are different for self-employment income versus hobby income versus other income, etc.

What kinds of income are you seeing on the 1099-K that you have received?

[Edited 2/2/2023 | 6:58 am PST]

@RJDPA

[drewcrawford03]

That's not exactly comforting that we should be confused. 

I was indeed very confused initially, but thought the explanation of "zeroing out" or "reversing" the non-income from the 1099k (deposits/fees/no actual income earned) was very straight forward and explicitly outlined as guidance by the IRS themselves. (I used "other" for the "income" selection versus hobby or business). 

The IRS is going to be INUNDATED with these 1099Ks this year. There's no way they go after all of them. Especially with things like gambling legalized across most states and the ridiculous issuance of these 1099K's that completely ignore deposits and only show withdrawals. It's honestly ludicrous. 

I currently feel pretty good about "zeroing out" and "reversing" the 1099K "income" I received (almost $200k), as my PayPal essentially functions as a tertiary bank account. I am wrong for feeling that way? 

[JamesG1]

Please document fully what you are reporting and why you are reporting it that way.

A taxing authority may come back a year or more later and ask questions.

I have spent hours re-constructing events that were years old in order to satisfy an IRS or state tax authority.

@drewcrawford03 

[drewcrawford03]

Yes for sure @JamesG1 , I am keeping detailed records as best as I can.

Is the income "reversal" a high trigger for audit in your experiences? 

Or is it pretty common, or will be common this year? 

Again, the 1099K is NOT an income statement from everything I've read, so this seems pretty cut and dry to me after hours of confusion and research HA!

[DianeW777]

The Form 1099-K is a form required to be issued to the IRS to track the money deposited to each recipient. Due to the change in rules for 2023, in regards to third party settlement organizations (TPSOs) (companies that handle and must account for the funds), it's going to be some time before we see the full impact. 

As indicated by @JamesG1 record keeping will be an absolute must for 2023.  The law has changed to reflect reporting when the amount exceeds $600 going forward. 

• Understanding your 1099-K
  • TPSOs are required to report payments for goods and services. The law is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member for a household bill. 

It's not intended but will incorporate those payments.  You must report the sale of personal items and sales of good and services.

NOTE: One personal item or a group of personal items sold in one transaction at a gain requires the gain to be taxed. 

One personal item or a group of personal items in one transaction sold at a loss, the loss is suspended and not allowed to reduce or offset other income, even the gain on personal items sold in a different transaction.

@drewcrawford03 

[drewcrawford03]

Ok so what if I have a 6 figure 1099K from paypal but it was all from investment day-trading deposits and withdrawals in which I had a net loss for the year?

So I did not receive a 1099 for investment profit but I did claim investment losses for the $3,000 carryover from year to year. 

In summary, I have a large 1099K, no income forms anywhere except work W-2, and claimed losses on investments and zeroed out my 1099K (no profit earned). 

This is appropriate, yes? 

@DianeW777  @JamesG1 

[HopeS]

Yes, but there are limits. The IRS allows you to deduct up to $3,000 in capital losses from your ordinary income each year—or $1,500 if you're married and filing separately.  Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

For example, if you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income.

See additional guidance below:

How to deduct Capital Loss

@drewcrawford03 

[drewcrawford03]

Yea, I know this.

My point is that I have tax form SHOWING big losses (even though only $3,000 counts) so maybe the IRS will just rightfully assume this is where my large 1099K non-profit dollars are coming from when I "zero it out". 

[RJDPA]

I'm clear now on how to handle the W2G & 1099k for the Federal taxes. Now when I offset the 1099k by claiming it as a negative amount in other income that doesn't transfer to my Pennsylvania return.  Do I just check the box that says "This income is not taxable in Pa" 

[DaveF1006]

Yes, you can check the box because since it isn't taxable income anyway, it is not taxable in PA.

@RJDPA

[herdowl51]

I am a NJ resident. I have followed @JamesG1 advice on zeroing out the 1099k by adding other income reversed, but it is still reflecting on my state return and is saying I owe a few thousand dollars in state taxes.. How would I offset/zero the amount for my NJ state return? @DaveF1006 ? Can you help me please?

[JamesG1]

You may be referring to IRS form 1099-K reported as Other Income on line 8 of the Federal 1040 tax return.

If the other income reversal entry does not flow from the Federal tax return to the NJ tax return, you may be able to make the reversal entry on the NJ tax return at the screen Other Non-Wage Income.

However, that entry may make your New Jersey tax return not eligible for electronic filing.  We have seen this message.

What was the nature of the income that you are reporting?  

TurboTax software now has additional entries at the bottom of the screen Let's get the info from your 1099-K which may be helpful to you.

@herdowl51 

[herdowl51]

I received a 1099k from PayPal. I used PayPal as basically a virtual wallet for online gambling. I'd deposit an amount, withdraw an amount and so forth. I was in the negative by A LOT on my win/loss statements from the casinos so it is definitely not income.

The negative amount I entered for my federal return offset and put me back into the green However it did not follow to my state return. Which has left me with a $2700 tax owed for state. Obviously the extra 1099k amount is indeed not income, but just needed to find a way to offset it/zero it like I did for my federal. 

If I have to print and mail it, then so be it. My state return (including 1099k offset/zero) would only be for about $6 anyway. 

@JamesG1 I guess mailing it will be my only option?