Do You Have to Claim eBay Sales on Taxes?
Uncover the tax realities of selling on eBay. Get clear guidance on understanding your income obligations and optimizing your tax position.
Selling items on online platforms like eBay requires understanding tax obligations. Income from these sales may be taxable, depending on the nature and volume of your selling activities. Recognizing whether your activities are a hobby or a business for tax purposes is the first step in meeting reporting responsibilities.
Understanding Taxable eBay Sales
Distinguishing between hobby and business eBay sales for tax purposes is crucial. The Internal Revenue Service (IRS) considers an activity a business if your primary purpose is profit, pursued with continuity and regularity. A hobby is pursued for enjoyment, without profit intention. The IRS considers factors like conducting the activity in a businesslike manner, time and effort invested, and reliance on the income for livelihood.
If your eBay sales are a hobby, income is taxable and must be reported. However, you cannot deduct hobby-related expenses to offset income. For example, selling a personal item for more than its original cost results in taxable gain. If your eBay sales are a business, all income is taxable, and you can deduct ordinary and necessary business expenses. Business income is also subject to self-employment taxes for Social Security and Medicare.
Third-party payment networks, like eBay, report transactions to the IRS using Form 1099-K. For 2024, this form is issued if gross payments for goods or services exceed $5,000. This threshold is part of a phased implementation and will decrease in subsequent years. Even without a Form 1099-K due to sales below this threshold, all taxable eBay income must still be reported. A Form 1099-K reports gross sales proceeds, not profit, and does not account for returns, cancelled transactions, or selling fees.
Reporting Your eBay Income
Once your eBay sales are determined taxable, reporting this income on your tax return is the next step. For business sellers, income and expenses are reported on Schedule C (Form 1040), “Profit or Loss from Business.” Sole proprietors use this form to detail gross receipts, cost of goods sold, and business expenses, calculating net profit or loss. Net profit from Schedule C transfers to your main Form 1040.
Business income on Schedule C is also subject to self-employment tax, covering Social Security and Medicare contributions. This tax is calculated on Schedule SE (Form 1040), “Self-Employment Tax.” The 2024 self-employment tax rate is 15.3%: 12.4% for Social Security (up to $168,600 for 2024) and 2.9% for Medicare (no income limit). You can deduct one-half of self-employment taxes when calculating adjusted gross income.
Hobby eBay sales income is reported differently. Taxable hobby income is listed on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income,” on Line 8z for “Other income.” This section is for income not directly reported on the main Form 1040. Regardless of hobby or business classification, maintaining accurate records of sales, fees, and expenses is crucial for proper tax reporting.
Deductible Expenses for eBay Sellers
Business eBay sellers can deduct ordinary and necessary business expenses to reduce taxable income. An expense is ordinary if common and accepted in your business, and necessary if helpful and appropriate. Only business sellers reporting on Schedule C can claim these deductions.
Cost of goods sold (COGS) is a primary deduction for sellers, representing direct costs of acquiring or producing items sold. This includes inventory purchase price, freight, and other costs to bring goods to salable condition. eBay and payment processing fees, like PayPal’s, are also deductible business expenses. Shipping costs, including postage, supplies (boxes, bubble wrap), and delivery charges, are also deductible.
Other common deductible expenses include advertising and marketing costs to promote listings, such as online ad spend. If you use a dedicated home space exclusively and regularly for your eBay business, you may qualify for the home office deduction. This deduction allows writing off a portion of expenses like:
Rent or mortgage interest
Utilities
Insurance related to that business space
A portion of internet and phone expenses can also be deducted if used for business. Mileage for business travel (e.g., trips to the post office or to source inventory) and subscriptions to business software or tools for eBay operations are also deductible.