Do You Have to Pay Income Tax on eBay Sales?

Selling items on platforms like eBay can generate income, and understanding the tax implications of these sales is important for individuals. While some sales may not be subject to income tax, others can create a tax obligation. The specifics depend on whether sales are considered a hobby or a business, and how much profit is generated. This guide provides clarity on reporting requirements and how to reduce potential tax burdens related to eBay sales.

Determining Taxable Income from Sales

Not all sales made on eBay are taxable. When selling personal items for less than their original purchase price, such as used furniture or electronics, any resulting loss is not taxable. However, if an item is sold for more than its original cost, the profit can be subject to capital gains tax.

Income from eBay sales becomes taxable when an individual sells items with the intent to make a profit, which the IRS classifies as either a hobby or a business. An activity is considered a business if the primary purpose is income or profit, and it is conducted with continuity and regularity. Conversely, a hobby is an activity pursued for enjoyment without the intention of making a profit, even if it occasionally generates income.

The IRS considers several factors when determining if an activity is a hobby or a business. These factors include:
Whether the activity is conducted in a businesslike manner.
The time and effort devoted to it.
The taxpayer’s dependence on the income for their livelihood.
Whether there is an expectation of profit from asset appreciation.
The taxpayer’s knowledge and expertise.
Success in similar activities.
Whether changes are made to improve profitability.
If an activity shows a profit in at least three of the last five tax years, the IRS presumes it is a business.

Taxable income refers to the net profit, which is the sales price minus the cost basis and any selling fees. The cost basis is the original purchase price of an item, including any associated fees or commissions. For example, if an item was bought for $100 and sold for $150 with $10 in fees, the profit would be $40 ($150 – $100 – $10). All income from sales, whether from a hobby or a business, is taxable and must be considered, regardless of whether a Form 1099-K is received.

Reporting Sales to Tax Authorities

Once taxable income from eBay sales has been determined, the next step involves reporting it to the tax authorities. The IRS uses Form 1099-K, “Payment Card and Third Party Network Transactions,” to report certain payment transactions. Online marketplaces and payment processors, such as eBay, are required to issue a Form 1099-K to sellers if their gross payments for goods or services exceed specific thresholds.

For the 2024 tax year, the federal reporting threshold for Form 1099-K is $5,000 or more in gross payment volume. Receiving a Form 1099-K primarily indicates that the platform has reported your gross sales to the IRS; it does not automatically mean all reported amounts are taxable income. Even if a Form 1099-K is not received, all taxable income from sales must still be reported.

For individuals operating their eBay sales as a business, income and expenses are reported on Schedule C (Form 1040), “Profit or Loss from Business (Sole Proprietorship).” This form is used to calculate the net profit or loss from business activities, which is then carried over to the individual’s main tax return (Form 1040). Schedule C requires reporting gross receipts or sales, cost of goods sold, and various business expenses.

If eBay sales are considered a hobby, the income is reported on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.” Hobby income is reported on Line 8j of Schedule 1 as “Other income.” Maintain detailed records of all transactions, including sales prices, original purchase costs, and fees, to accurately complete tax forms. eBay provides transaction history and fee reports to compile the required information for tax reporting.

Reducing Your Taxable Income

Legitimate expenses can reduce taxable income from eBay sales. For those operating an eBay business, many ordinary and necessary business expenses are deductible. The cost of goods sold (COGS) is a deduction, encompassing the cost of inventory purchases or manufacturing expenses.

Common deductible expenses for eBay sellers include:
Shipping costs.
Packaging materials.
Platform fees charged by eBay or payment processors.
Advertising and marketing costs.
Business-related mileage for activities like picking up inventory or dropping off packages.

If a portion of a home is used exclusively and regularly for business purposes, sellers can qualify for a home office deduction. This deduction allows for the write-off of a percentage of home-related expenses like rent or mortgage interest, utilities, and insurance, based on the square footage of the dedicated business space. The IRS offers a simplified option for this deduction, allowing $5 per square foot of home used for business, up to 300 square feet, with a maximum deduction of $1,500.

Record-keeping for all income and expenses is essential. Maintaining detailed records, including receipts, invoices, and transaction logs, allows sellers to substantiate their deductions in the event of an IRS inquiry. This documentation helps ensure accurate tax reporting and maximizes eligible deductions.