You can find almost anything for sale on eBay, from a piece of fine art to clippings of Justin Bieber’s hair. So it's no surprise that the IRS doesn't view all sellers alike in the online marketplace. You may not have to pay tax at all if you are essentially hosting an online garage sale, but if you run your eBay account more like a business, you should be reporting your sales to the IRS.
Not All eBay Sales are subject to income tax
Not every eBay sale is subject to income tax, but most are. If you use the site to get rid of household articles you've used in the past, you may qualify for "occasional garage or yard sale" treatment. According to the IRS, if your online auction sales are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report income from those sales.
Assuming that you originally bought the used items for more money than you are selling them for, you don't have to report the income received from the eBay sale. For example, if you sell a bicycle that you paid $500 for two years ago for $350 on eBay, you usually don't have to notify the IRS—and you can't claim a loss on it.
Hobby sales must be reported
If you and the IRS classify your eBay sales as a hobby, you'll have to report the income on Form 1040. For tax years prior to 2018, you report your expenses as an itemize deduction on Schedule A. Beginning in 2018, you are no longer eligible to take a deduction for hobby expenses.
Since you cannot use hobby expenses to reduce your hobby income, you won't be able to use a loss from hobby sales to reduce other income. This can be important if you make money in other activities.
However, if your eBay activities are considered a business, you can use your loss as a deduction to reduce your other business income, say from landscaping. For example, let’s say that you have:
- A net loss of $5,000 from your eBay sales operation.
- A taxable income of $15,000 from a landscaping business.
- $15,000 (income) - $5,000 (loss) = $10,000 (business income).
Distinguishing between a hobby and a business is not an exact science. The IRS looks to many factors including:
- Frequency of your eBay sales
- How much you earn
- How much time you spend working on the hobby/business
For tax years prior to 2023, the threshold is more than $20,000 in gross sales plus more than 200 payment transactions on eBay. For tax years beginning with 2023, if you have third-party payment transactions totaling more than $600 then you should receive a 1099-K form reporting this income to the IRS. There is no threshold for payment card transactions such as credit card swipes that do not go through a third-party payment processor.
Using eBay to make profits is usually a business
If you sell and buy articles on eBay in order to earn money, the IRS will likely classify your sales activities as a business. This means you will have to report net income from eBay sales. Report your total gross income on Schedule C, then reduce it to net income by subtracting the amounts you spent for allowable business-related expenses.
For example, if your income is $45,000 and you have “business-related expenses” that total $10,000:
- $45,000 - $10,000 = $35,000
- $35,000 is your net income on your Schedule C
Business tax deductions for eBay sellers
The only tax deductions you can use to reduce your gross eBay sales income are those authorized by the IRS, but you'll have quite a few to choose from. Consider whether you qualify for:
- Costs to purchase or fix up the items sold
- Deductions for business use of your vehicle, either actual expenses or the standard mileage rate. For the first half of 2022 the standard mileage rate is 58.5 cents per mile and increases to 62.5 cents per mile for the second half of 2022.
- Advertising expenses
- Apportioned amount of phone and Internet charges related to your eBay business
If you're still unsure if something is deductible, check out a more comprehensive list of common small business expenses.
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