Does the IRS Tax Your Venmo Transactions?

by TK Sanders
(Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

Ever since Venmo debuted over ten years ago, users have been sending and receiving small amounts of money with ease. The app quickly became this era’s version of pocket change: instead of carrying cash to reimburse friends for little everyday loans, folks simply sent the money electronically.

Of course, Venmo permits larger transactions, but the app mostly caters to small debts and purchases amongst friends. If you want to send a larger payment like monthly rent you can, but Venmo does cap weekly transactions based on identity verifications. Basically, they want to foster an environment of both ease and transparency.

However, the Biden administration recently enacted legislation meant to oversee more personal transactions. Part of the American Rescue Plan quietly included the lowering of monitor thresholds for small monetary app payments. Prior to the new law, the government (IRS) didn’t care about small transactions until the total surpassed $20,000. But now they want to know about anything above $600.

Once the media got wind of the change, stories about small transaction apps like Venmo began gaining steam. But headlines can be deceiving.

The truth is that the government says that they only care about business transactions above $600 from mobile payment apps. Small business owners, independent contractors, and “side hustlers” who use payment apps will now need to report these smaller transactions to the IRS. But personal transactions between friends and family will not be monitored or taxed.

What Triggered the Law Change For Apps Like Venmo?

Taxation is what the whole change is all about. This country has become increasingly interested in the notion of fairness lately, and the government thinks that one way to better ensure fairness is by enhancing the tax code. Still, the IRS cannot reliably monitor all of the millions of daily transactions that happen daily in this country; nor would they want to try. The changes to the laws are just meant to better monitor businesses that may have evaded taxes in the past.

“There’s been a lot of misunderstanding about the tax reporting changes,” says Garrett Watson, senior policy analyst at the Tax Foundation. “It doesn’t change anything about if any transactions are taxed or not.”

Therefore, your split check at dinner will not be monitored nor taxed. In truth, the IRS will only receive aggregate data from the apps. This means that they will get a bird’s eye view of money in and out, but will not bother chasing down details.

If you currently use third-party selling or cash apps like Venmo, Zelle, PayPal, or others to facilitate your business, the apps will provide tax documents at year’s end. Expect a 1099-K from the payment apps come tax season next year. They also might have you fill out a W-9 to help them track your data easier.

Watson also says that he expects audits to be rare. Only major transactions or large sums of money on apps will be noticed. But that’s been true since the inception of these apps.

“If we’re talking about a significant figure, into the five or six figures, of course you would want documentation,” he says. “But normal folks using it day to day, I wouldn’t worry about it too much. It shouldn’t dissuade you from using [the apps].”