I Asked ChatGPT How Side Hustles Are Taxed — Here's Your Game Plan on Tax Day
I entered a simple prompt in ChatGPT: "How do different types of side hustles get taxed in the U.S.?"
It generated a thorough and accurate reply, even if it differentiated side hustles into dubious distinctions: freelance, gig work, e-commerce, YouTube, rental properties, real estate syndications and stocks/ETFs.
To check its wisdom, I consulted real experts. Here's a starter on side hustle taxes, including tips from real humans.
Hustle Confidently: The Side Hustler’s Guide to Paying Taxes Without Crying (Much)
Take Action: 5 Signs You’re Losing Money Every Month — and How To Find the Leaks
Freelance and Business Income
Freelance and gig work make you self-employed — you effectively run a business, whether you form a legal entity or not.
If you do freelance work for someone else, they'll likely send you a 1099. (If you don't earn enough with a single client to qualify for a 1099, you'll be responsible for any paperwork proving how much they paid you.) ChatGPT noted that you report that income on Schedule C of your tax return and you'll pay regular income tax rates on it, plus self-employment tax (15.3%).
Annette Nellen, tax professor at San Jose State University, said, "That income is taxable even if you do not receive a 1099 reporting the income." Still, you may be able to offset some of that income with work-related expenses, which don't require you to itemize your personal deductions.
You can also potentially take the 20% qualified business income deduction (read more from the IRS).
Rental Income
ChatGPT correctly pointed out that rental income and expenses go on Schedule E of your return. It also noted that you'll pay taxes at your regular income tax rate, but you can offset that income with depreciation.
The chatbot also offered a helpful reminder to deduct related expenses including mortgage interest, property taxes, repairs and insurance.
Tax attorney Alyssa Maloof Whatley said, "Rental income is not subject to self-employment tax but may be limited by passive activity rules."
ChatGPT got quirky in naming "Passive Income Side Hustles" as its own category and listed investments like real estate syndications and notes. These are truly passive investments, like stocks. You fund the investment and then you sit back and enjoy passive income, unlike buying and owning rental properties which requires real labor.
Trading Income
Technically, the chatbot listed "Investing (Stocks, ETFs, Crypto)" as a side hustle. Investing is not a side business — but day trading is.
ChatGPT correctly differentiated between short-term and long-term capital gains. It pointed out that assets like stocks or cryptocurrencies held for less than one year are taxed at your regular income tax rate, as short-term gains.
It also noted that if you hold a trade long enough to earn a dividend, the tax would depend on whether it was a qualified or nonqualified dividend. The government taxes nonqualified dividends at your regular income tax rate and qualified dividends at the long-term capital gains rate. Read the distinction from the IRS for more.
Overall, everything the chatbot said was technically accurate. But it confused the difference between a side hustle involving labor versus passive investing and categorized its answer oddly. Why is "YouTube" its own answer as a side hustle? Only the AI gods know.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: