AFSA NEWS 50 JANUARY-FEBRUARY 2024 | THE FOREIGN SERVICE JOURNAL 1099-K: Payment Card and Third-Party Network Transactions The reporting requirements for business transactions processed through third-party payment settlement entities (PSE) such as Venmo and PayPal were put on hold for certain transactions in 2022. Starting with 2023, a taxpayer who receives amounts from business transactions through a PSE that exceed $600 (regardless of the number of individual transactions) will be issued a 1099-K by the PSE for 2023. Although there is pending legislation in Congress to increase the $600 threshold, this legislation may not pass in time to affect 2023 tax returns or may not pass at all. The 1099-K will need to be accounted for on the taxpayer’s 2023 tax return. If the 1099-K was issued due to the sale of personal items, the taxpayer must calculate the gain or loss from the sales of personal items on a per transaction basis. Each sale of a personal item that resulted in a gain must be reported on both Form 8949 and Schedule D, even if the taxpayer did not receive a 1099-K reporting the transaction. The sale of personal items that results in a loss must only be reported if the taxpayer received a 1099-K reporting the transaction. In this case, the taxpayer must report the proceeds from the sale and the cost basis as equal amounts so no loss is reported, because personal losses are not tax deductible. If the sale of personal items that results in a loss is not reported on a 1099-K, then the sale does not need to be reported to the IRS. Readers should keep adequate records to substantiate the original purchase price of sold items. Readers should also ensure they code transactions through PSEs correctly so only business-related transactions are reported on Form 1099-K. Finally, readers should confirm if the payment service they are using is a PSE. Certain money transfer services, such as Zelle, are not PSEs and are not required to issue a Form 1099-K. Virtual Currency/Digital Assets In recent years, the IRS has placed increased scrutiny on virtual currency transactions (now referred to as a digital asset, along with many other types of digital assets such as nonfungible tokens [NFTs]). The draft 2023 Form 1040 illustrates this continued scrutiny by requiring taxpayers to confirm in a check box on page 1 of Form 1040 whether the taxpayer received a reward, award, or payment for property or services or sold, exchanged, or otherwise disposed of any digital asset or a financial interest in any digital asset during 2023. In addition to confirming if a reportable transaction occurred during 2023, members must be sure to complete the forms necessary to report the transaction when required, along with any resulting income or deductions. Further, virtual currency/digital assets held in accounts outside the United States should be reported as a foreign asset on the FinCen114 (FBAR) and Form 8938 if reporting thresholds are met. Although foreign accounts that only hold virtual currency are not currently required to be reported on the FinCen114 (FBAR), FinCen Notice 2020-2 states that FinCen intends to amend the FBAR regulations to include virtual currencies as FBAR reportable accounts. The IRS has provided FAQs related to digital assets, which can be found at https://irs.gov/ individuals/international-taxpayers/frequently-asked- questions-on-virtual-currency-transactions. Readers should particularly note that taxpayers who use virtual currency to pay for goods or services or who sell virtual currency must report the transaction(s) on their income tax return. Taxpayers who receive virtual currency as payment for services must report currency received as income on their tax return. Virtual currency that a taxpayer holds as an investment is generally taxed as a capital gain or loss, as described in the preceding section. Many other types of virtual currency/digital asset transactions must also be reported on the taxpayer’s tax return. AFSA recommends consulting IRS Notice 2014-21 as modified by IRS Notice 2023-34, Revenue Ruling 2019-24, Revenue Ruling 2023-14, specific to NFTs IRS Notice 2023-27, and the FAQs to determine the tax treatment, if any, of a transaction. Investments in Real Estate Taxpayers generally invest in real estate in five scenarios: Scenario 1: To live in as their personal residence. Scenario 2: For use as a vacation home. Scenario 3: To live in as their personal residence but rent out at times when not living in it. Scenario 4: To rent to a third party strictly for investment income purposes with no personal use. Scenario 5: To rent as a short-term rental (e.g., Airbnb). Adjusted Basis In all five scenarios, it is important to properly calculate the adjusted basis of the property. Please refer to Tax Topic 703; Publication 551; Form 1040 Schedule D with instructions; IRC Sections 1011, 1012, and 1014 through 1017; and associated tax regulations beginning at 26 CFR Sec. 1.1012-1. Scenario 1: Personal Residence Never Rented. While living in the property as a personal residence, a taxpayer may deduct mortgage interest and property taxes as an itemized deduction on Schedule A, subject to limitations. Current tax law allows a taxpayer to deduct mortgage interest up to current mortgage limits ($375,000 MFS/$750,000 MFJ unless the mortgage meets the requirements for grandfathered mortgage limit of $500,000 MFS/$1 million MFJ) for up to two properties: a personal residence and a second home personally used by the taxpayer. Interest paid on home equity loans
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