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—but 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 are 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
If you make more than $20,000 in gross sales and have 200 or more transactions on eBay, you should receive a 1099-K form reporting this income to the IRS.
Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.
Using eBay to make profits is 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 deduction, 56 cents a mile in 2021
- 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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