Do You Have to Pay Taxes for Selling on eBay?

Selling items online, whether to clear out unused possessions or to operate a dedicated business, can introduce questions about tax obligations. Many individuals who use platforms such as eBay wonder if their sales generate taxable income. Tax rules do apply to these activities, encompassing various scenarios from casual selling to operating a regular online store. Understanding these requirements helps ensure compliance with federal tax regulations.

Understanding Taxable Income from Sales

Determining what constitutes taxable income from online sales depends on the nature of the selling activity. Selling personal items at a loss does not create taxable income, as these transactions do not generate a profit. Conversely, selling items for a profit, or engaging in regular selling activities with the intent to earn income, results in taxable income.

The Internal Revenue Service (IRS) distinguishes between “gross income” and “net profit.” Gross income is the total amount received from sales before expenses. Net profit is the amount remaining after subtracting allowable business expenses from gross income, and this figure is subject to income tax.

Third-party payment networks, including online marketplaces like eBay, are required to report transaction data to the IRS on Form 1099-K. For tax year 2023, platforms issued Form 1099-K if a seller had over $20,000 in gross payments and more than 200 transactions. For tax year 2024, the IRS reduced this threshold to $5,000 in gross payments, with no minimum transaction count, as part of a phased approach towards a $600 threshold in future years. Even if a seller does not receive a Form 1099-K, any income earned from selling activities is still taxable and must be reported.

A distinction for tax purposes lies between a “hobby” and a “business.” A hobby is pursued for enjoyment with no intention of profit, while a business operates with the goal of earning income. The IRS considers factors like whether the activity is conducted in a businesslike manner, the time and effort dedicated, income’s essentiality for livelihood, and past profits. Income from a hobby must be reported on Schedule 1 (Form 1040) as “Other Income.” However, hobby expenses are generally not deductible. In contrast, business income and expenses are reported on Schedule C (Form 1040), allowing for the deduction of ordinary and necessary business expenses.

Identifying Deductible Expenses

Sellers operating a business on eBay can reduce taxable income by deducting ordinary and necessary business expenses. Only expenses directly related to the business activity are eligible. Maintaining meticulous records of all income and expenses is essential for accurately calculating deductions and supporting them if questioned by tax authorities.

Common expenses deductible by business sellers include fees paid to eBay for listings and final value fees, and shipping costs. The cost of goods sold, the amount originally paid for items, is also deductible. Packaging supplies are deductible business costs.

If a portion of a seller’s home is used exclusively and regularly for business, home office expenses may be deductible. This deduction is calculated based on the percentage of the home dedicated to business use, covering a portion of rent or mortgage interest, utilities, and insurance. Other deductible expenses include advertising costs, mileage for business-related travel, and professional development related to the selling business.

Reporting Your Income and Expenses

Reporting income and expenses from eBay sales to the IRS involves specific forms, depending on whether the activity is classified as a business or a hobby. For individuals operating an online selling business as a sole proprietorship, income and deductible expenses are reported on Schedule C (Form 1040), “Profit or Loss from Business.” This form calculates the net profit or loss, which then flows to the individual’s Form 1040.

Business sellers may also be subject to self-employment tax, covering Social Security and Medicare taxes for self-employed individuals. This tax is calculated on net earnings from self-employment using Schedule SE (Form 1040), “Self-Employment Tax.” The self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies to net earnings up to $168,600 for 2024, while the Medicare portion applies to all net earnings. One-half of the self-employment tax paid is deductible as an adjustment to income on Form 1040, reducing overall taxable income.

For those whose online selling is considered a hobby, income is reported on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income,” under “Other Income.” Hobby expenses are generally not deductible against this income. Individuals with significant self-employment income, typically if they expect to owe at least $1,000 in tax, may need to make estimated tax payments throughout the year. These payments help ensure tax obligations are met as income is earned, avoiding potential penalties for underpayment.

Sales Tax Considerations

Sales tax is distinct from income tax on profits. While income tax is levied on a seller’s net earnings, sales tax is collected from buyers at the point of sale and remitted to state and local tax authorities. This distinction is important for online sellers to understand.

For most sellers on eBay, the platform simplifies sales tax compliance due to “marketplace facilitator” laws. These laws require online marketplaces, including eBay, to calculate, collect, and remit sales tax on behalf of sellers for transactions made through their platforms. In most states with sales tax, eBay handles the entire sales tax process for transactions on its platform.

Due to marketplace facilitator laws, eBay automatically adds the applicable sales tax to the buyer’s order total at checkout and remits it to the relevant state. However, sellers should verify their specific state’s rules, especially if they also sell items outside of the eBay platform or operate as a larger business with sales tax nexus requirements in multiple states. In such cases, sellers might need to manage sales tax obligations for off-platform sales independently.