Honestly, I think you're overthinking this. I've been selling digital art through PayPal for years and never reported income under $2000. The IRS has bigger fish to fry than small-time artists making a few hundred bucks. PayPal didn't even issue you a tax form!

I went through this exact same situation last year with my freelance graphic design work through PayPal! The confusion is totally understandable because PayPal's reporting thresholds and your actual tax obligations are two completely different things. Here's what I learned after consulting with a CPA: You absolutely need to report that $754 as self-employment income on Schedule C, and you'll owe self-employment tax on it (which is about 15.3% for Social Security and Medicare). The fact that PayPal didn't send you a 1099-K is irrelevant - you're still legally required to report all income. The good news is you can deduct those PayPal fees as a business expense! Keep track of all your art supplies, software subscriptions, and any other legitimate business costs. I was surprised to learn I could even deduct a portion of my phone and internet bills since I use them for client communication. For next year, I'd recommend setting aside about 25-30% of each payment you receive for taxes. It makes filing much less stressful when you're not scrambling to find money to pay what you owe. One more tip: if your art income grows to where you expect to owe more than $1,000 in taxes for the year, you'll need to start making quarterly estimated tax payments to avoid penalties. But at your current income level, you should be fine paying annually.

Beth, I totally understand the stress you're feeling - tax situations with crypto gambling and unreported income can feel overwhelming. Here's what I'd focus on if I were in your shoes: First, yes, you do need to report crypto gambling activity, but as others mentioned, losses are only deductible up to your winnings amount. Keep detailed records of all your gambling transactions - deposits, withdrawals, wins, and losses. For your unreported cash income and the "Green Thumb Services" work, the IRS considers all income taxable regardless of how you received it. Even informal business income needs to be reported. Since you're self-employed, you'll likely need to file Schedule C for the lawn care business and pay self-employment taxes. My advice: consider filing amended returns for previous years where you didn't report income, and definitely get this year's filing correct. The voluntary disclosure approach mentioned by others really does result in lower penalties than if the IRS discovers unreported income on their own. Given the complexity of your situation with both crypto gambling and unreported business income, it might be worth consulting with a tax professional who has experience with these specific issues. The peace of mind alone could be worth it, and they can help you navigate the best way to get compliant while minimizing penalties. You're taking the right step by addressing this now rather than ignoring it. The IRS is much more lenient when taxpayers come forward voluntarily.

Beth, I can definitely relate to the tax anxiety you're experiencing. I went through something similar a couple years ago with unreported freelance income and crypto trading losses. The stress was eating me alive until I finally faced it head-on. Here's what helped me: I started by gathering every single document I could find - bank statements, crypto exchange records, any payment receipts from cash jobs, everything. Even if it seemed insignificant. For your "Green Thumb Services" work, collect any texts, emails, or notes about payments you received. The IRS likes to see that you're making a good faith effort to be accurate. One thing that surprised me was how much better I felt once I started the process of getting compliant. The unknown was scarier than the reality. Yes, there were penalties and interest, but they worked with me on a payment plan since I came forward voluntarily. For crypto gambling specifically, if you can't get proper documentation from the platforms, try to reconstruct your activity using bank statements and crypto wallet transactions. The blockchain is public, so everything is technically verifiable even if the gambling site doesn't provide good records. My biggest regret was waiting so long to address it. The "ostrich approach" of burying your head in the sand just makes the problem grow with interest and penalties. You're being smart by tackling this now, even though it feels overwhelming. Take it one step at a time and don't let the stress paralyze you into inaction.

To all those having trouble reaching a human at IRS. I just ran across this video that gave me a shortcut to reach a human. Hope it helps! https://youtu.be/_kiP6q8DX5c

I've been dealing with this exact same message for about 6 weeks now. From what I've learned, the 151 topic usually means they're doing additional verification - could be income matching, identity verification, or checking your credits/deductions. The frustrating part is the wait time can be anywhere from a few weeks to several months. I've called the IRS twice and both times waited over 2 hours just to be told "it's under review, wait for a letter." Really considering trying one of those AI tools people are mentioning to at least understand what's causing the delay instead of being left in the dark.

Has anyone here actually been audited while taking this position? I've been thinking about this exact scenario but I'm terrified of an audit. My tax person says this is a "gray area" even with good documentation.

Your interpretation of the IRS publications is correct, but there are several practical considerations your CPA is likely concerned about that are worth discussing. You're right that Publication 936 specifically addresses this scenario - when mortgage proceeds exceed the $750k limit but are used for investment purposes, the excess interest can potentially be deducted as investment interest expense. The key phrase is "potentially" because of the limitations involved. First, the tracing requirement is strict. You'll need to demonstrate that the funds went directly from mortgage proceeds to investments. This typically means same-day or next-day transfers with clear documentation. I'd recommend opening a separate investment account funded solely by the mortgage proceeds to create an unambiguous paper trail. Second, investment interest deductions are limited to your net investment income for the year. This includes interest, non-qualified dividends, and short-term capital gains - but NOT long-term capital gains or qualified dividends unless you make a specific election to treat them as ordinary income (giving up the preferential tax rates). Third, your CPA's caution about Publication 550 is valid - it specifically excludes qualified home mortgage interest from investment interest treatment. However, the portion over $750k that you're allocating to investments wouldn't qualify as "qualified home mortgage interest" anyway. The election to treat debt as not secured by your home is another option, but it's an all-or-nothing choice for the entire loan, not just the excess portion. Given current interest rates and the limitations on investment income, run the numbers carefully to ensure the strategy makes economic sense beyond just the tax benefits.

Does anyone know if state tax filing follows the same rules? I'm in California with a similar situation (I'm resident, spouse is non-resident on F1) and I'm not sure if making the federal election to file jointly means we have to file jointly for state too?

Great discussion everyone! I wanted to add another perspective as someone who went through this exact situation last year. One thing to keep in mind is timing - since you got married in May 2025, you'll be considered married for the entire tax year for filing purposes. This means you can choose between MFJ or MFS for your 2025 return. I'd also suggest documenting everything carefully. When I made the Section 6013(g) election, I kept copies of all the paperwork including the statement attached to our return, my wife's I-94, and her I-20 showing her F1 status. The IRS never questioned it, but having that documentation ready gave me peace of mind. Another consideration: if your wife plans to change visa status in the future (like applying for a green card), filing jointly and making the election won't negatively impact that process. In fact, it can sometimes help establish the legitimacy of your marriage for immigration purposes. The tax savings from MFJ are usually substantial enough to outweigh the added complexity of reporting worldwide income, especially if her foreign income is minimal like most F1 students.