Do You Have to Pay Income Taxes on eBay Sales?

Question

I have recently started selling on eBay, trying to make a bit extra to pay down debt. Is there a minimum amount that I can make before I have to pay taxes on my eBay income? I certainly don’t want to get in hot water with the IRS! Can you recommend a book or website that discusses the tax situation for eBay sellers?

Answers

I’ve sold a few items on eBay and yes you have to pay taxes on your profit — this is not the same as your eBay income. Here’s my general rule of thumb:

  1. If you’re selling used stuff that you no longer want, you don’t have to report it. This is not to avoid paying taxes, but because you probably didn’t make any profit from the sale.  For example, let’s say you paid $100 for a pair of shoes and sold it for $75, it’s a net loss and that’s before eBay and PayPal expenses.  Yes, you got $75 income, but it’s not profit.
  2. If you’re selling items to make money on eBay, then report these activities to the IRS. In short, you need to keep track of what you received and your costs, such as (1) what you’ve paid for your products, (2) procurement costs — i.e., shipping or cost of traveling to the store, (3) eBay listing and selling fees, (4) cost of shipping to your buyers, (5) PayPal fees, and (6) any other costs related to your eBay activities.  You’ll be taxed on the profit, or the difference between your total income minus your total expenses.

Updated 7/10/2012 based on reader’s comment:

According to the IRS Publication 525, Taxable and Nontaxable Income, page 35:

Sales of personal items. If you sold an item you owned for personal use, such as a car, refridgerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it as explained in the Instruction for Schedule D (Form 1040). You cannot deduct a loss.

However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss.

Example. You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your $80 gain as a capital gain as explained in the Instructions for Schedule D (Form 1040).

Here’s a response from David at My Two Dollars:

I would recommend June Walker’s book: Self-employed Tax Solutions — which while written for freelancers and the like, has great tax information inside as well for anyone making money on the side.  I read the book for my own blog income, and I can see where some of the information is relevant to making money on the Internet.

And yes, you do have to pay taxes on eBay income…at least by law you do. However, eBay does not issues 1099’s and they do not report sales to the IRS. Most people who sell a few things probably don’t report it, but if you start selling a lot, I would most certainly claim it on my taxes.

Do you do this as a hobby or a business?  Do you have plans to make a profit, or just to unload some of your junk? Just to be on the safe side, if you start selling a ton of stuff, I would keep track for the year and then talk to a tax pro at tax time.  Little sales over 12 months can really add up to quite a bit of money!

Here’s a response from Patrick at Cash Money Life:

I recommend reading Lower your Taxes Big Time, by Sandy Botkin. The book is aimed primarily at people who own a small business or earn alternative forms of income through things such as consulting, crafting, selling things on eBay, or anything else. At less than $14, the book should easily pay for itself – or just borrow a copy from your local library.

Concerning items sold on eBay, yes, you will have to pay taxes on them. However, you only pay taxes on your profits, not on all items sold. The other thing to keep in mind is that you can deduct expenses as well. Common expenses for eBay include listing fees, shipping and insurance, PayPal fees, etc.

Example 1: You have a designer dress that you bought for a Christmas ball. You spent $100 on it, wore it once, then decided you won’t wear it again, so you list it on eBay. If you sell it for $75, you didn’t make any profit on it, so you shouldn’t have to pay any taxes on it.

Example 2: You go to several yard sales and find a couple items that you think might be worth more than the asking price. You pay $5 for a box of 10 widgets and turn around and sell them on eBay for $20 each. That $5 investment just turned into $200! Great deal! But you will need to pay taxes on your $195 profit (less expenses).

I highly recommend buying a tax book or speaking with a tax professional for more details. Each situation is different and there may be other things you may be able to deduct, or other things you may need to pay taxes on.

About the Author

By , on Jan 12, 2009
The following is a question submitted by our reader. You can see all questions submitted here, and submit your question here. Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a financial expert as needed.

Leave Your Comment (75 Comments)

  1. Patrick says:

    I have a question guys. THis is actually great link here.

    So far since 7 months ago on eBay after fees,shipping etc.. I made 2400$ on eBay. And that was on 66 transactions.

    Is this amount to little for it to be taxable? I am actually using my family members paypal and ebay for that.

    I should just be under 20k or 200 transactions? basically I think 2400$ is not a lot for timeframe of 6 months and it should not bother anyone at IRS.

    Someone give me a tip. Please thank you :)

    • ohyeah says:

      If you’re using a family member’s paypal, then that’s under their name, and the IRS would be coming after them instead of you. And I’m pretty sure that as of right now, you have to have both 20K AND 200 transactions for Paypal to send you a form.

      Of course, that’s the question, how much is too much? $1,000? $10,000? Yeah, $2,400 in the grand scheme of things is not much at all. I’d just be afraid that if you didn’t report it, and you somehow got audited down the road and they found out, that whatever penalty they’d levy would wipe out all the profit you made. So then the whole thing was a waste of time. Don’t know how big of a penalty they could do though.

  2. LukeDuke says:

    Last year I made over 20k profit on ebay and did not report it, this year a little more then that and I will definitely not report it either. No need to, it is almost impossible for the IRS to find out.

    • Tina07 says:

      If you sell and are paid through Paypal, Paypal reports to the IRS when you make $20K or over $20K

    • Tina07 says:

      Here’s the 1099K form that Paypal has to send to the IRS as FILER, the seller is the PAYEE..when you make over 20K and are paid through Paypal, Paypal has to report for Third Party Transactions using payment cards…

      http://www.irs.gov/pub/irs-pdf/f1099k.pdf

    • Imtiaz Ali says:

      Luke My friend thought the same and called me stupid because I was paying taxes….Guess what…..He have to pay big time plenty for next 5 years now….I wish I could post his pic here….lolz…I am Laughing I am bad…this is what he is going to say any ways.

  3. Dennis French says:

    eBay frowns upon dropshipping on their site. If they catch you, you can be shut down.

    It happened to a friend of mine. They ask him to prove he’s an ‘authorized dealer from the manufacturer’ And when those can’t be given, they shut him down.

    Seriously, though, dropshipping profit margins are INCREDIBLY thin anyway.

    I prefer the Auction Debt Eliminator’s method anyway.. High profit margins, and it’s a legitimate system.

  4. Claudia Barclay says:

    I just started doing “drop shipping” and I sell on a few different sites online. I have only had a total of 5 sales and made a profit of maybe $40 to $50 total, I haven’t registered my business yet but I do have a EIN. I am considedred self employed according to what I read. So I am guessing I don’t need the EIN? Anyways, on drop ship items it looks like I actually made more on Paypal then I actually made. I have to pay store fees on some of the sites and the paypal fees plus the actual cost of the item. Then I keep the difference which isn’t much. How do I pay taxes? The only other income I get is my spousal support of $934.00 per month. I have spent quite a bit of money trying to get my “business” started. Normally I have to pay taxes all at once when I file because the government doesn’t take taxes out of my spousal support. I’m so confused. What forms do I need to file?? I only do internet sales. I plan on selling jewelry, clothes and other items that I have made myself and possibly giving up the “drop ship” idea all together.

    Thanks,
    Claudia

    • Imtiaz Ali says:

      Dear Claudia your story is same like mine….when I gave call to IRS at my initial stage they guy said “you don’t have to worry about. just keep your financial proves with you and in the end of year there will be some kind of form he said for extra income and just pay it. Calculations of sealing on ebay I have been listed on previous posts some time today.

      Believe me or not. IRS is really Helpful if you give them call and ask them any question. if you have been done tax returns with H&R Blocks then you can just walk in anytime to ask any professional tip from them free for rest of year….you have been paid for that.

      fell free to call at 269-861-3079 to discus anything about what should you do and what if and what if not…..these were the questions when I was a small small person before CEO of……

  5. Jannet says:

    I couldn’t help but see people grumbling about paying taxes when they don’t seem to be makin gprofit. The article said very clearly, you pay taxes, have cust. pay taxes, and report your sales on Ebay IF YOU ARE MAKING PROFIT! I for one have been selling vintage items and CD I bought over 10 years ago and I have no idea what most of them were worth but making a few bucks here and there on those items, and after selling a lot of little stuff, I’ve made about $626 before taking out fees and shipping…which would really make it $426 ish. I do not have to pay taxes because I did not make profit. I’m losing profit..hugely. I mean I have looked up items of equal kind and based prices far under their sale value on purpose. I’m not trying to be greedy…I just need extra cash for college because I can’t get a private loan and my Father doesn’t have the credit and even at age 26 I still can’t get it without a parental cosigner. So for those of you freaking out…if you are selling stuff for cash cause you’re broke, and you are not making profit……….YOU DO NOT NEED TO REPORT IT! Calm down :P.

    • Imtiaz Ali says:

      Jannet…you know why a lot of business around us are getting close? Just because of calculations, we don’t look at cost. Really when money come in hand it looks like oh wow I made 25 Mil this year and when we come down what we have then we say…hummmmmm Really did we made 25 Mil this year…God Dam….. Where the hell money is….This is how I fell when my CPA hand over my Yearly report…lolz

    • Eric says:

      But the IRS can (and did) adjust income based on PayPal sales and send you a bill – even after you tell them it is used personal belonging that you are selling and are not making any profit.

      Next step – appeal

  6. Suresh says:

    my god I never thought we need to pay for ebay sales. Looks I missed to investigate on this topic.

    • Imtiaz Ali says:

      Suresh you shouldn’t be worry about if you have sold out something like pent for $10 or some computer equipment which were not in your use for while. Real trouble is when you make something as your business. I have bought so many cars and have sold them out so many times… don’t worry about those kind of small deals or some times deals.

  7. Ben Ellis says:

    Anyone who thinks that if they buy something for 20 dollars and sells it for 50 on eBay and nets 30 dollars the sale will lose their shirt!

  8. Tom says:

    This is from IRS Pub 525: “If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it as explained in the Instructions for Schedule D (Form 1040). You cannot deduct a loss. However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital income and any loss is deductible as a capital loss.” My reading of this is that for non-business sales of personal use items, you cannot offset your gains on some items with losses on other items. Which sucks.

  9. Vanessa says:

    Thank you so much, Pinyo. Your answers really help.

  10. Pinyo says:

    @Vanessa – You do not have to send the receipts to the IRS, but you should keep them for 3 years. If you’re audited, you’ll have to be able to proof that you paid what you said you did.

  11. Vanessa says:

    Thank you very much, Pinyo. Your answer really answered my question. Again, thanks. I have another question. When I do the income tax for the items that I sold on ebay, do I need to show receipts of the items that I purchased to IRS?

  12. Pinyo says:

    @Vannessa – Unfortunately, when you don’t know the cost basis (what you paid), the IRS consider that to be $0 and you have to pay taxes for the entire sale amount. You can read IRS Publication 551 for more info.

  13. Vannessa says:

    I just sold 4 unwanted items on ebay within the last 2 months. 3 out of 4 items were gifts. 2 were used and one was new with tag (but the price portion was cut off). The 4th item; which was non-gifted one, was purchased by me about 10 years ago; which, of course, I have lost its receipt. So will I have to report it to IRS for next tax year and will I have to pay income tax for those 4 items? I don’t even know or remember each item’s cost? Please answer my question. Thanks.

  14. Pinyo says:

    @John – I think you should consult a tax advisor because I am not quite sure how to handle it with 3 people.

    If this is a one person show, my answer would be to set up an S-Corp and a Solo 401k. You can pay yourself ~$30k salary, contribute $17k of $30k into your 401k. You’d then end up paying taxes on the $13k difference. The company can match 25% of the $30k salary (e.g., $7,500), leaving $2,500, of which $1,000 will go toward payroll taxes (i.e., employer’s part Social Security and Medicare). The remaining $1,500 would be paid to you as a dividend (which you do have to pay taxes on).

    For 3 people, it is still a good idea to set up a corporation, and you want the PayPal account should be under the company’s EIN (this way no one get stuck with the 1099-K form). The investment would be considered a loan to the corporation. Assuming the profit after the loan repayment is split equally 3 ways, you each could put away 25% of the profit into a SEP IRA and pay taxes on the remaining 75%.

  15. John says:

    Pinyo,

    A friend came to me with a suggestion to buy widgets on ebay for 10k. A co-investor and I purchased them. We’re planning for a 3 way split of the profits after expenses are paid back to the 2 investors. We’re hoping to sell all of the widgets this year for about 40k. The friend is the one who’s going to sell everything after the initial inventory is established.

    I was hoping you might give us some suggestions on how best to shield this money from taxes… I don’t mean to AVOID or EVADE, I simply mean, some ideas to protect our money and use it intelligently.

    We’re also wondering if there would be an appropriate way for us to form a business… or if its suggested. We were thinking if the guy selling them sells them ALL on his ebay/paypal account, he’s going to get hit for 40k in profit, unless he can somehow explain/verify how he got the widgets… So what if he considers the two investors as “costs”, meaning he’s paying us (for the initial investment). For instance, we paid 10k, he pays us each 15k (5k to pay back investment, 10k is our split), he’s left with 10k “profit”. How then would we all claim the income? In that case, we’d each have 10k “profit”… but what about our time? We’ve already spent 20+ hrs each and we’ve only just begun organizing… we plan for it to take another month, working part time to get ready. I consider my time very valuable, but can we write it off? Should we all consider looking to purchase ‘business expense’ type items to reduce our profits? For example, we really need more computers, but we’re hesitant to spend the money before we start making profit.

    Anyways, long rant, just hoping for a few suggestions and thoughts on our plan… thank you for taking the time, your website is very informative!

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