For a new generation, cash is most definitely not king. Digital wallet apps such as Venmo or Apple Pay have supplanted the way money changes hands to the degree that many young people have no interest in getting paid back with old fashioned bills or shudder at hand-written checks. The IRS has taken notice, and come January, anyone who does business using third-party payment networks will receive a 1099-K for income over $600.
The move to digital wallets and the IRS’ new policy is part of a longer evolution. Each stage of America’s monetary life has led to big changes in how society operates. Americans have moved from coins to paper bills to checks to credit cards to debit cards. Each path has led to complaints and legitimate concerns over fraud and the possibility of overspending. Digital apps are no different, though they have their own unique set of benefits and challenges, some with significant tax planning implications.
Forewarned Is Forearmed, So Check Your Boxes
The good news for many is that the IRS’ 1099-K rule will almost certainly not affect them. The law previously required either $20,000 in spending or 200 transactions. Recognizing the popularity of digital wallets, especially for gig economy workers, the government radically lowered the bar. But the reporting only involves payments made under the goods and services tag. Paying back for coffee, for example, will not be included.
But for those receiving goods and services payments, a feature that gig workers use, there is a need to be more on top of expenses. Even people who may not think they would be hit by a reporting requirement, such as a babysitter, may find themselves receiving the 1099-K. Business transactions are always taxable, even if you did not get a 1099-K, but now the numbers are going to be reported, and there may be possible mistakes that incorrectly boost income.
In tax planning, forewarned is forearmed. Workers and businesses should start calculating deductible expenses and make sure that all payments are properly categorized. No need to pay taxes on reimbursements for buying your friend’s coffee simply because they checked the wrong box. Taking a proactive stance can help avoid an unpleasant surprise at tax time.
Float vs. Debt Avoidance: Pick Your Poison
But the tax implications are just one part—and arguably the smallest part—of the revolution wrought by digital wallets. Digital wallet use is another step in a return to “real time banking.” Previous generations took advantage of float, or the time between when a payment is made and when it is subtracted from the payee’s account. Both checks and credit cards allow users this leeway.
The problem, especially with credit cards, is that failing to keep track of your payments could lead to finance charges and mounting debt. Debit cards and digital wallets work the other way. Whatever number you have in your bank account is how much you can spend. You don’t get the benefit of a few days between the purchase and payment, but you avoid extra costs.
For skill building, it isn’t clear if this is better or worse than an old-fashioned checking account, where users would manually write down their expenses and learn to balance their checkbook. The many bouncing checks show that check writing was not a great educational tool. Certainly, this can be better than credit cards, which don’t require budgeting and allow users to build up significant debt. Preventing debt and learning budget skills may be the best results of digital cash.
Are Digital Wallets the Real Social Media Powerhouse?
There is one not-so-hidden danger of digital wallets that people should be aware of: the social media function. While we make a big deal of Facebook, Instagram, and Twitter, digital wallets may be the most important social media app of all.
Any accountant can attest that money tells a story. Unless users shut off the share function, they can leave behind a public virtual paper trail of expenditures, which is more revealing than any carefully curated pictures or comments that make up what we think of as social media. There is a real need to alert a new generation of users that transparency in spending frequently is not the best approach.
After years at the top, the days of cash and checks are facing a rising challenge from digital wallets. Young people, who have grown up in a completely smartphone-dependent culture, are natural adopters. As it grows up with them, we and the IRS now see the positives and negatives of its use. Digital wallets help people track their expenses, budget, and easily pay their bills and reimburse friends. At the same time, users give up the benefit of float and take on the potential dangers that could happen from radical transparency. Digital wallets are here to stay for this new generation, who should be aware of why this can be either a good or a bad development in their financial lives.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Jody Padar, CPA, is head of tax at April, an intelligent tax platform. She is the author of “From Success to Significance: The Radical CPA Guide,” “The Radical CPA: New Rules for the Future-Ready Firm,” and “Botkeeper for Dummies.”
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