Received 1099-K for PayPal transaction that was actually a gift - help!

If I report it on Schedule C like you suggested, would I need to pay self-employment tax on that amount? And will this trigger an audit since I don't normally file a Schedule C?

You wouldn't pay self-employment tax because you'd be reporting both the income and an equal expense, resulting in zero net profit. Self-employment tax only applies to your net profit. While including a Schedule C when you don't normally have business income might increase your audit risk slightly, properly documenting that this was a gift transaction mistakenly processed as a business payment is your best protection. Include a statement explaining the situation. The risk of not reporting a 1099-K that the IRS has received is generally higher than explaining the circumstances on your return.

How does this service work? Do they actually fill out your tax forms for you or just give you advice? I'm dealing with a 1099-K issue too but from Facebook Marketplace sales.

I'm a bit skeptical... did you actually get audited after using their advice? I'm worried about reporting my PayPal stuff incorrectly and getting in trouble with the IRS later.

They don't fill out your forms - they analyze your tax documents and give you personalized guidance. You get detailed instructions that explain exactly what to do with each form and where to report things. I found it super helpful because you can upload your actual documents and get specific advice. I didn't get audited, but I followed their recommendation to include a detailed statement explaining the situation along with my return. They showed me exactly where to report the 1099-K amount and how to offset it properly so I wouldn't pay taxes on something that wasn't actually income.

Wait how is this even possible? I thought the whole point is that you CANT get through to the IRS. How much did you pay for this?

This sounds like a scam tbh. Why would the IRS talk to you about how to avoid paying taxes on income they're expecting you to report? I'm really doubtful this is legitimate.

It works because they have a system that dials and waits on hold for you - when they get an agent, they call you and connect you directly. It's completely legitimate, you're still the one talking to the IRS. The IRS agent didn't tell me how to "avoid" taxes - they explained the proper way to report transactions that were miscategorized, which is exactly their job. They confirmed I should report the 1099-K but also explained how to document that it wasn't actually business income. The agent was actually really helpful once I got through.

I tried that route last year and PayPal told me they couldn't change it once the transaction was complete. Even with both parties confirming it was a mistake. They basically said I'd have to handle it on my tax return. But that was my experience - maybe others have had better luck?

Thanks for sharing your experience. That's disappointing to hear. I was hoping to address this before it became a tax issue. I'll probably reach out to PayPal anyway just to try, but will prepare for handling it on my tax return. Did you end up using Schedule C to offset it like some have suggested?

Crypto adds another layer of complexity. If your dad transferred Bitcoin to you as a gift, it's still a gift for tax purposes, but Coinbase may have issued a 1099 because they don't know the nature of the transfer. The important thing to know is that you take on your dad's cost basis in the Bitcoin. You won't owe any taxes until you sell the Bitcoin, at which point you'll pay capital gains tax on the difference between your dad's purchase price and your selling price. Make sure to document that this was a gift transfer so you have proof if questioned.