Do I Have to Pay Taxes on Reselling Items?

Reselling items, whether through online marketplaces or local channels, has become a popular way for many individuals to earn additional income. These activities often carry important tax implications. Understanding how reselling income is treated for tax purposes is paramount to ensure compliance and avoid issues with tax authorities. This guide outlines tax considerations for individuals engaged in reselling.

Determining Taxable Income from Reselling

Reselling, for tax purposes, involves purchasing items to resell for profit. This differs from selling personal, used items not acquired for resale. Generally, when you sell personal items for less than you paid for them, any loss incurred is not tax-deductible, and the sale itself is not taxable. However, if you sell a personal item for more than its original cost, the profit realized from that sale is usually taxable.

When engaged in reselling as a business, your gross income is the total revenue from sales. To determine your net income, subtract the cost of goods sold (COGS) from your gross income. COGS includes the purchase price of items, shipping costs to acquire them, and direct expenses to prepare them for sale (e.g., cleaning, minor repairs). Accurate net income calculation is essential for reporting earnings.

For tax purposes, a distinction exists between a “hobby” and a “business.” A business aims for profit and operates with continuity and regularity. Reselling for personal enjoyment without a consistent profit motive may be a hobby. Hobby income is taxable, but related expenses are not deductible, unlike business income. The IRS considers factors to determine if an activity is a hobby or a business, including whether you operate in a businesslike manner, the time and effort invested, and reliance on the income for livelihood.

Types of Taxes on Reselling Activities

Reselling income, when a business, is subject to several taxes. Net profit from reselling is subject to federal income tax, like wages. It may also be subject to state income tax, with rates varying by overall taxable income and filing status.

Sole proprietors or single-member LLCs engaged in reselling also pay self-employment tax. This covers Social Security and Medicare contributions. The rate is 15.3% (12.4% for Social Security, 2.9% for Medicare). This applies to 92.35% of net self-employment earnings. For 2025, Social Security applies up to $176,100 in earnings; Medicare has no limit.

Resellers must also consider sales tax. If you sell taxable goods in states with “sales tax nexus,” you must collect and remit sales tax to the state. Nexus typically means a physical presence, like an office, warehouse, or employees. Some states have economic nexus rules, requiring out-of-state sellers to collect sales tax if sales into that state exceed certain revenue or transaction thresholds. Sales tax is not reseller income; it is collected on behalf of the state.

Reporting Reselling Income

Reporting reselling income involves specific tax forms for accurate declaration to the IRS. Many online platforms and payment processors issue Form 1099-K to sellers. For 2025, a Form 1099-K is generally issued if you receive over $2,500 in gross payments through a third-party payment network, regardless of transaction count. The 1099-K reports gross payments, not net profit; receiving it does not mean the entire amount is taxable.

Business reselling income and expenses are typically reported on Schedule C (Form 1040). Sole proprietors and single-member LLCs use this form to detail gross receipts, COGS, and operating expenses. Net profit or loss from Schedule C flows to your Form 1040, affecting overall taxable income.

Self-employment tax is calculated using Schedule SE (Form 1040). This form uses net profit from Schedule C to calculate Social Security and Medicare taxes. The calculated tax from Schedule SE is reported on Form 1040. File Schedule SE if net self-employment earnings are $400 or more.

Individuals expecting to owe at least $1,000 in tax, especially those with self-employment income not subject to withholding, generally make estimated tax payments throughout the year. Payments are made using Form 1040-ES. Estimated taxes are usually due quarterly: April 15, June 15, September 15, and January 15 of the following year. Timely payments help avoid underpayment penalties.

Allowable Deductions for Resellers

Resellers can reduce taxable income by claiming business deductions. Expenses must be “ordinary and necessary” for business operation. Ordinary expenses are common in your industry; necessary expenses are helpful and appropriate for your business.

One of the primary deductions is the cost of goods sold, which directly reduces your gross income to arrive at gross profit. Beyond COGS, common deductible expenses for resellers include selling fees charged by platforms like eBay or Etsy, and shipping costs incurred when sending items to customers. The cost of packaging supplies, such as boxes, bubble mailers, and tape, is also deductible. A portion of internet and phone expenses can be deducted if used for business, typically prorated based on business usage.

If you use a dedicated space in your home exclusively and regularly for your reselling business, you may qualify for the home office deduction. This deduction can cover a portion of expenses like rent or mortgage interest, utilities, and insurance related to that space. There are two methods for calculating this: the simplified method, which allows a deduction of $5 per square foot up to 300 square feet ($1,500 maximum), or the regular method, which involves calculating actual expenses based on the percentage of your home used for business.

Mileage driven for business purposes, such as sourcing inventory or trips to the post office, is also deductible. For 2025, the standard mileage rate for business use is 70 cents per mile. Other deductible expenses can include advertising and marketing costs, software subscriptions, and bank fees.

Record Keeping for Reselling Businesses

Maintaining accurate and comprehensive records is fundamental for any reselling business, serving multiple purposes. Good record keeping is essential for correctly calculating your income and expenses, supporting any deductions you claim, and providing necessary documentation in the event of an IRS inquiry or audit. Without proper records, it can be challenging to prove the legitimacy of your reported income and deductions.

You should meticulously keep records of all sales, including the date of sale, the item sold, the selling price, the platform used, and buyer information. Equally important are purchase records, detailing the date of purchase, the item, its cost, and the seller. All expense receipts, such as those for shipping, supplies, selling fees, and mileage logs, must also be retained. Bank statements and tax forms received, like Form 1099-K, should be part of your organized records.

Records can be kept in various formats, whether physical copies or digital files, using simple spreadsheets or dedicated accounting software. The IRS does not mandate a specific record-keeping system, only that it clearly shows your income and expenses. 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. However, it is advisable to keep records longer in certain situations, such as six years if you underreported income by more than 25%, or indefinitely for fraudulent returns. Maintaining organized records simplifies tax preparation and provides a clear financial picture of your reselling activities.