Do You Pay Tax on eBay Sales? The IRS Requirements

Many individuals sell on platforms like eBay and wonder about the tax implications. Tax responsibilities for eBay sales are not uniform, depending on the nature and volume of selling activity.

Determining If Your eBay Sales Are Taxable

Whether income from eBay sales is taxable largely hinges on distinguishing between a hobby and a business. The IRS categorizes an activity as a business if its primary purpose is profit generation, reflecting continuity and regularity. A hobby is pursued for personal enjoyment, with no intent to profit, even if income is generated.

Sales of personal items for less than their original purchase price generally do not result in taxable income. For example, if an item bought for $300 sells for $50, no income tax is due as it’s sold at a loss. However, if a personal item sells for more than its original cost, the profit is a taxable capital gain.

The IRS uses several factors to determine if an activity is a business or a hobby, including businesslike conduct with accurate records, time and effort expended for profit, and dependence on income for livelihood. While no single factor is definitive, consistently making a profit in at least three out of five years can create a presumption of a business. If an activity is deemed a hobby, any income must be reported, but associated expenses are generally not deductible.

Identifying Taxable Income and Deductible Expenses

Once an eBay selling activity is determined to be a business, calculating net profit subject to tax is necessary. Taxable income from eBay sales is gross sales revenue minus the cost of goods sold and other ordinary and necessary business expenses.

The “cost of goods sold” (COGS) represents direct costs associated with items sold. For eBay sellers, COGS includes the purchase price of items for resale and any shipping costs to acquire inventory. For example, if an item bought for $10 sold for $25, the $10 is part of COGS, reducing gross profit.

Beyond COGS, various other expenses can be deducted to reduce taxable income. Common deductible expenses for eBay sellers include platform fees charged by eBay for listing and selling products, and payment processing fees from services like PayPal. Shipping costs incurred for sending items to buyers, along with the cost of packaging supplies, are also deductible. Other potential deductions include a prorated portion of internet and phone bills used for business, home office expenses if a dedicated space is regularly and exclusively used for the business, and advertising costs for promoting listings. Maintaining accurate records of all income and expenses is important for calculating net profit and substantiating deductions.

Understanding Your Tax Responsibilities

Individuals operating an eBay business face several tax obligations. Federal income tax applies to net profit from eBay sales, added to any other income earned. Overall tax liability is determined by total income, applicable deductions, and tax bracket.

Beyond income tax, self-employment tax is important for sole proprietors through eBay. This tax covers Social Security and Medicare contributions, combining employer and employee portions. For 2024 and 2025, the self-employment tax rate is 15.3% on net earnings, consisting of 12.4% for Social Security (up to an annual income limit of $168,600 for 2024 and $176,100 for 2025) and 2.9% for Medicare on all net earnings. A deduction for one-half of the self-employment tax paid is allowed, reducing adjusted gross income for income tax purposes.

State income taxes may also apply to business income from eBay sales, depending on the state where the seller resides and operates. While rates and rules vary by state, the net profit from the eBay business is typically incorporated into the state’s income tax calculation. Sales tax obligations have largely been simplified for eBay sellers due to marketplace facilitator laws enacted by most states. Under these laws, eBay is generally responsible for collecting and remitting sales tax on behalf of third-party sellers for transactions made through its platform. However, sellers may still have sales tax responsibilities for sales made outside the eBay platform or in specific situations where marketplace facilitator laws do not apply.

Navigating Tax Reporting for eBay Sales

Reporting eBay sales to the IRS involves understanding specific forms and maintaining thorough records. Form 1099-K, “Payment Card and Third Party Network Transactions,” is an important document issued by payment processors like eBay to sellers. For tax year 2023, eBay generally issues a Form 1099-K if gross payments exceed $20,000 and there are over 200 transactions. For tax year 2024, the threshold is $5,000, with no transaction minimum, as part of a transitional phase. The 1099-K reports gross sales and does not account for returns, fees, or cost of goods sold, meaning it does not reflect actual taxable profit.

The 1099-K reports gross sales, not taxable profit. All income must be reported, regardless of whether a 1099-K is received. Accurate record-keeping is important for calculating taxable income. Sellers should maintain detailed records of sales receipts, expense invoices, mileage logs for business-related travel, and inventory records to accurately determine net profit.

Business sellers may need to make estimated tax payments throughout the year to avoid underpayment penalties. The U.S. tax system operates on a pay-as-you-go basis; individuals, including sole proprietors, generally must make estimated tax payments if they expect to owe at least $1,000 in tax for the current year. These payments are typically made quarterly, covering federal income tax and self-employment tax.

The primary IRS form used by sole proprietors to report income and expenses from an eBay business is Schedule C (Form 1040), “Profit or Loss from Business.” This form details gross receipts, cost of goods sold, and various business expenses, arriving at a net profit or loss. The net profit calculated on Schedule C is then transferred to Form 1040.

If net earnings from self-employment are $400 or more, sellers must use Schedule SE (Form 1040), “Self-Employment Tax,” to calculate Social Security and Medicare tax liability. The self-employment tax calculated on Schedule SE is then reported on Schedule 2 of Form 1040. Tax preparation software, professional tax preparers, or manual filing can be used to complete and submit these forms.