How Much Tax Do You Owe on Your eBay Sales?

Selling items on platforms like eBay comes with tax responsibilities. This article focuses on income tax requirements for individuals selling goods on eBay. For most eBay sales, the platform automatically handles sales tax collection and remittance due to marketplace facilitator laws, meaning sellers generally do not need to worry about collecting or remitting sales tax on transactions.

Differentiating Business from Hobby Sales

The way your eBay sales are taxed depends on whether the Internal Revenue Service (IRS) classifies your activity as a business or a hobby. This distinction is based on your intent to make a profit. If your primary purpose for selling is for personal enjoyment with no intention of profit, it is a hobby. However, if you conduct your selling activities with continuity and regularity, aiming to generate income or profit, it is likely a business.

The IRS considers several factors when making this determination, including whether you carry out the activity in a businesslike manner, maintain accurate records, and put time and effort into making it profitable. Your dependence on the income from the activity, your history of profit or loss in similar activities, and whether you change methods to improve profitability are also considered. If an activity shows a profit in at least three out of the last five tax years, the IRS generally presumes it is a business.

Tax implications differ significantly. For a business, income and expenses are reported on Schedule C, Profit or Loss from Business, and qualified business expenses are fully deductible. Conversely, hobby income is reported as “Other Income” on Schedule 1 (Form 1040), but expenses related to the hobby are generally not deductible after the Tax Cuts and Jobs Act of 2017. This means that while hobby income is taxable, you cannot reduce that income with related expenses.

Identifying Taxable Income from Sales

Gross taxable income from eBay sales includes the total sales proceeds before any deductions for fees or expenses. This means the full amount the buyer paid for an item is counted as income.

eBay, as a third-party payment processor, issues Form 1099-K to sellers who meet specific reporting thresholds. For the 2024 tax year, eBay will issue a 1099-K if your gross sales exceed $5,000. This threshold is set to decrease in subsequent years, to $2,500 in 2025 and $600 in 2026 and beyond. The Form 1099-K reports the gross payment volume and does not account for credits, discounts, fees, or refunds.

Even if you do not receive a Form 1099-K, all income from your business activities is taxable and must be reported to the IRS. Returns and refunds impact your gross income by reducing the actual amount received from sales, and these adjustments should be reflected when calculating your total sales.

Understanding Deductions and Cost Basis

To determine your net taxable income, you can apply various deductions. For eBay sellers operating a business, many ordinary and necessary expenses incurred can be deducted. Common deductible expenses include eBay listing and final value fees, payment processing fees, and shipping costs.

Other eligible deductions may encompass packaging supplies, advertising expenses, and business software subscriptions. If you use a portion of your home exclusively and regularly for your eBay business, you might also qualify for home office deductions. Vehicle expenses, such as mileage for sourcing inventory, can also be deducted, either using actual expenses or the standard mileage rate (67 cents per mile for 2024).

“Cost basis” refers to the original cost of the item you sold, including any shipping costs incurred when acquiring the item. For purchased inventory, the cost basis is the purchase price. If you sell a personal item for more than its original cost, the cost basis would be your original purchase price. However, if you sell a personal item at a loss, that loss is generally not deductible. Accurate tracking of your cost basis and all deductible expenses is important for minimizing your tax liability.

Record Keeping for eBay Sales

Maintaining thorough and accurate records is important for any eBay seller to support reported income and claimed deductions. You should keep detailed records of all sales, including the date of sale, item sold, selling price, and buyer information.

Equally important is tracking all expenses. This includes documenting all eBay and payment processing fees, shipping costs, and the cost of packaging supplies. Additionally, meticulous records of the cost basis for each item sold are necessary to calculate your profit or loss accurately. For inventory, this means tracking purchase dates, costs, and selling prices.

You can use various methods for record keeping, such as spreadsheets, accounting software, or organized physical receipts. The IRS generally requires you to keep records for at least three years from the date you filed your original tax return, or two years from the date you paid the tax, whichever is later. However, if you substantially underreport income, the IRS can extend the audit period to six years.

Reporting Your Income

Report your eBay income on your tax forms. If your selling activity is classified as a business, you will typically report your income and expenses on Schedule C, Profit or Loss from Business (Form 1040). Part I of Schedule C is where you report your gross receipts or sales, while Part II is dedicated to listing your deductible business expenses. If applicable, Part III addresses the cost of goods sold, which is deducted from gross receipts to determine gross profit. The net profit or loss from Schedule C is then transferred to your Form 1040.

For those whose eBay activity is considered a hobby, the income is reported on Schedule 1 (Form 1040) as “Other Income.” This distinction means hobby income is subject to income tax but not self-employment tax. Business income, however, is generally subject to self-employment taxes, which cover Social Security and Medicare taxes for self-employed individuals. This tax is calculated on Schedule SE, Self-Employment Tax, typically on 92.35% of your net earnings from self-employment, and the rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). The amount from Schedule SE is then reported on Schedule 2 (Form 1040), Additional Taxes.