Do You Pay Income Tax on eBay Sales?

Income generated from online sales platforms like eBay is generally subject to taxation. It is important for sellers to understand their tax obligations to ensure compliance with tax laws. This involves correctly classifying sales activities, accurately calculating taxable profit, and properly reporting income to the Internal Revenue Service (IRS).

Classifying Your Sales for Tax Purposes

The distinction between a “hobby” and a “business” significantly impacts how eBay sales are treated for tax purposes. An activity is generally considered a business if its primary purpose is to generate profit, while a hobby is pursued for enjoyment without the intention of making money. The IRS considers several factors when making this determination.

Factors that indicate a business include maintaining accurate books and records, dedicating substantial time and effort to the activity with profitability in mind, and relying on the income for livelihood. Conversely, if the activity has elements of personal pleasure or recreation, or if it consistently generates losses, it might be classified as a hobby. If an activity shows a profit in at least three out of five consecutive tax years, the IRS presumes it is a business.

Income from a business is fully taxable, and sellers can deduct ordinary and necessary business expenses to reduce their taxable income. This can include operating expenses, such as home office costs, work-related travel, and advertising. For hobby sellers, income must still be reported, but the ability to deduct associated expenses is significantly limited. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions, including hobby expenses, through 2025. This means hobby income is taxable, but related expenses are not deductible.

Understanding Your Sales Information

Payment processors, including eBay Managed Payments, play a role in reporting gross sales to the IRS. They issue Form 1099-K, which details the gross payment volume processed for goods or services. This form assists sellers in filing their tax returns.

A Form 1099-K will generally be issued if the gross payments received for goods or services through a third-party payment network exceed $2,500. This form reports gross sales and does not account for returns, fees, or other expenses. Receiving a Form 1099-K does not automatically mean that all the reported income is taxable profit, nor does it indicate that a profit was necessarily made. All income from selling goods or services must be reported on a tax return, regardless of whether a Form 1099-K is received.

Calculating Your Taxable Profit

Determining taxable profit involves subtracting eligible expenses from gross sales. Gross sales include the total amount received from buyers, including any amounts collected for shipping.

Deductible expenses for business sellers include eBay selling fees (such as listing fees, final value fees, and store subscription costs), shipping costs (postage and packaging supplies), and the cost of goods sold (COGS). COGS represents the original purchase price of items intended for resale, including wholesale inventory or second-hand items. Other deductions include a portion of home office expenses if a space is used exclusively and regularly for business, business software subscriptions, advertising fees, and a percentage of internet and phone bills attributable to business use. Vehicle expenses for business-related travel can also be deducted, either through actual expenses or the standard mileage rate.

Reporting Your Income to the IRS

The method for reporting eBay income to the IRS depends on whether the activity is classified as a business or a hobby. Business sellers typically report their profit or loss on Schedule C (Form 1040), titled “Profit or Loss From Business.” The net profit or loss from the eBay business is then calculated on this form and carried over to the individual’s Form 1040.

Hobby sellers, conversely, report their income on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.” Since hobby expenses are generally not deductible for federal tax purposes through 2025, hobby income is reported without offsetting deductions.

Essential Records for Tax Purposes

Maintaining thorough and organized records throughout the year is important for eBay sellers. Accurate record-keeping supports reported income and expenses and is helpful during an IRS inquiry or audit.

Sellers should retain sales records, including detailed transaction reports from eBay. Receipts for all purchases, particularly for items bought for resale, establish the cost of goods sold. Records of eBay fees, shipping costs, and packaging supplies are also important. Bank statements, credit card statements, and records related to business use of personal assets, such as mileage logs, should be kept. The IRS generally suggests keeping most tax records for at least three years from the date a tax return was filed.