Selling on eBay can be a fun hobby or a serious business. It’s important for both casual sellers and full-blown business owners to know that their income may be subject to taxes. For further clarification on what classifies as income, here are a few things all eBay sellers should know.
Will eBay Send a 1099-K?
Unlike some other third party processors like Amazon and Uber, eBay does not provide its users with tax forms like the 1099-K. As an online platform that facilitates transactions, eBay does not actively take part in the sales process, and does not have the full record of a sale or shipment. Because shipping and payment are left to the individual users, eBay is not accountable for activities outside its platform, i.e. everything except the listings and auctions.
If you’re a high volume seller who uses PayPal, you will receive a 1099-K form from PayPal provided that you:
- Made over $20,000 in unadjusted gross sales income in a year and
- Had over 200 transactions.
Even if you don’t receive a 1099-K from PayPal, you still need to report any income you earn on eBay to the IRS.
Where Can I Find My 1099-K Form on PayPal?
If you meet the above conditions, you will be able to access your 1099-K on your PayPal account after January 27th, 2017.
I Sold a Few Things on eBay. Do I Need to Report the Income?
Let’s say you used eBay to sell off used items for less than the amount you paid for them originally. These amounts are not considered taxable income, since you didn’t make any profit. The IRS states that “If your online auction sales are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report the sales.”
To show the IRS you did not make a profit on your sales of used goods, it’s always advisable to keep receipts of the original purchase. If you don’t have the receipt showing how much you spent on your inventory, you can use the fair market value to price your items. Remember you can also add shipping and packing fees to the cost of the item.
However, if you sell the items for more than the original price, you’ll need to report that gain on Schedule D: Capital Gains and Losses, and attach it to your Form 1040. So for example, if you bought an antique chair for $100 and sold it for $150, you have a gain of $50 to report.
Note: There can be exceptions.
In addition to cases where you’ve made a profit selling a used item, the IRS may also consider your eBay sales to be taxable income if there are regular, recurring transactions like a business.
What’s the Difference Between a Hobby and a Business?
Although you need to report all profits and/or income from a hobby as well as a business, you’ll first need to determine whether you can report your sales as a hobby or a business, so that you can claim the appropriate deductions, losses, etc.
Some basic factors the IRS considers to differentiate between a hobby and a business are:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
If your eBay sales are a hobby:
Your hobby income from eBay will need to be reported on Form 1040, using Schedule A for itemized deductions. Since your activities are considered a hobby, you won’t be able to claim losses.
When it comes to deductions, you can claim any expenses such as eBay fees, shipping, packing and mileage to bring down your net income.
If your eBay sales are a business:
If you’re selling on eBay as a business, report your profits and losses on Schedule C, which is used for self-employed people who don’t have bosses that withhold taxes for them. Even if you’re employed part-time or full-time elsewhere, you’ll still need to fill out the Schedule for your eBay activities.
If you’ve made more than $400 in net profit from your eBay sales, you’ll also need to fill out Schedule SE to figure out how much you owe in self-employment taxes.
You can also claim any losses from your eBay business as deductions to reduce your income. Other deductions include inventory costs, shipping fees, eBay and PayPal fees, travel expenses, software, as well as office expenses. However, you are only allowed to claim home office expenses if you use the space exclusively for your eBay activities. Otherwise, you may be eligible for a business-use percentage deduction on your office supplies and furniture.
If you’re just getting started, check out our guide to all the terms, forms and dates you need to be aware of.