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?
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:
- 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.
- 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.
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