Do I Have to Claim eBay Sales on My Taxes?

Understanding the tax implications of online sales is important, as income generated can be subject to taxation. Rules and reporting requirements vary depending on the selling activity and amounts involved. It is essential to determine whether your online sales are considered personal transactions, a hobby, or a business for tax purposes.

Determining Taxable Sales

The taxability of your sales depends on what you are selling and your intent. When selling personal items for less than their original purchase price, the sale typically does not result in taxable income because it is considered a loss. However, if a personal item is sold for more than its original purchase price, the profit generated is taxable as a capital gain. The original cost of the item is referred to as its “basis.”

An activity is classified as a “hobby” if it is pursued for enjoyment with no intention of making a profit. Gross income from hobby sales is taxable and must be reported. Expenses related to hobby activities are generally not deductible.

An activity is considered a “business” if it is conducted regularly and continuously with a primary motive of earning a profit. All gross income from business sales is taxable, and ordinary and necessary business expenses incurred to generate that income are fully deductible. The IRS considers several factors when distinguishing between a hobby and a business, including businesslike conduct, time and effort invested, and profit/loss history. An activity is presumed to be a business if it generates a profit in at least three out of five consecutive tax years.

Online marketplaces and payment processors may be required to report sales income to the IRS on Form 1099-K. For the 2024 tax year, the threshold for receiving a Form 1099-K is generally $5,000 in gross payments, and for 2025, it is set at $2,500. Starting in 2026, the threshold is planned to revert to $600. Even if you do not receive a Form 1099-K, any taxable income from your online sales must still be reported on your tax return.

Reporting Taxable Sales

Sellers might receive a Form 1099-K from a payment processor if their sales activity meets reporting thresholds. This form reports the gross amount of payments received, which does not account for selling fees, shipping costs, product returns, or the original cost of items sold. Receiving a 1099-K does not automatically mean all reported income represents taxable profit; it is merely a summary of transactions processed through the platform.

If your online selling is considered a hobby, you must report the gross income on Schedule 1 (Form 1040), Line 8j, labeled “Other income.” As noted, expenses related to hobby income are generally not deductible.

For those operating an online selling business, all income and expenses are reported on Schedule C (Form 1040), “Profit or Loss from Business.” This form allows for the deduction of ordinary and necessary business expenses. Common deductible expenses can include the cost of goods sold, listing and final value fees, shipping costs, advertising, and, if applicable, a portion of home office expenses.

Business income reported on Schedule C is also subject to self-employment tax, which covers Social Security and Medicare taxes. This tax applies if your net earnings from self-employment are $400 or more. The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. Self-employed individuals are responsible for both the employer and employee portions of these taxes, but they can deduct one-half of their self-employment taxes paid when calculating their adjusted gross income.

Record Keeping for eBay Sellers

Maintaining accurate and organized records is important for all sellers, regardless of whether their activity is a hobby or a business. These records are essential for accurately determining income and expenses, substantiating deductions, calculating profit or loss, and responding to IRS inquiries. Proper documentation helps ensure compliance and can prevent issues during a tax audit.

Sellers should retain specific types of documents to support their tax filings. This includes purchase receipts for items sold, important for establishing the original cost or “basis” of goods. Records of all sales, detailing the final sale price and transaction dates, are also necessary. Documentation of all platform fees, shipping costs, and other business-related expenses should be kept.

Bank statements, especially those linked to online selling activities, provide a clear trail of income and expenses. Any Form 1099-K received should be retained, along with records of other general business expenses like advertising or office supplies. Generally, tax records should be kept for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, as this aligns with the IRS’s statute of limitations for audits. However, in certain situations, such as significant underreporting of income, the IRS may have up to six years to assess additional tax.

To facilitate record keeping, sellers can use various methods, including keeping physical copies of receipts and invoices, utilizing spreadsheets to track transactions, or employing dedicated accounting software. Digital copies of documents are generally acceptable as long as they are legible and easily accessible.