What Happens If I Sell More Than $600 on eBay?

Selling items on eBay can be a great way to make extra cash, but once sales exceed a certain threshold, tax reporting requirements apply. Many sellers are unaware that exceeding $600 in sales may result in additional paperwork and tax obligations. Understanding these rules can help prevent surprises during tax season.

1099-K Trigger

Receiving more than $600 in gross payments from buyers on eBay can result in a Form 1099-K from the platform. This form, issued by third-party payment processors like PayPal or eBay Payments, reports total payments received for goods and services. The $600 threshold, established under the American Rescue Plan Act of 2021, significantly lowered the previous federal reporting requirement of $20,000 and 200 transactions.

The 1099-K is an informational return sent to both the seller and the IRS, meaning the IRS is aware of the total payments received. The form reports gross sales figures before deductions like shipping costs, eBay fees, or refunds, which can make the reported amount appear higher than actual profits.

Receiving a 1099-K doesn’t automatically mean taxes are owed, but it does increase the likelihood of IRS scrutiny if the reported income isn’t properly accounted for. The IRS may compare the form’s total with what is reported on a seller’s tax filing, and discrepancies could trigger an audit.

Taxable Earnings

The IRS generally considers money earned from selling on eBay taxable, but whether it is fully taxable depends on several factors. If an item is sold for more than its original purchase price, the profit is considered a capital gain and must be reported. Short-term gains, from items held for one year or less, are taxed as ordinary income, while long-term gains benefit from lower tax rates, typically ranging from 0% to 20% depending on total income.

Selling personal property at a loss, such as used clothing or old electronics for less than the original purchase price, does not create a deductible loss for tax purposes. The IRS does not allow deductions for losses on personal-use items. However, if the sale is part of an ongoing business, losses may be offset against other business income.

For those who resell items regularly, the IRS may classify the income as business earnings rather than capital gains. Business income is subject to self-employment tax, which includes Social Security and Medicare taxes, totaling 15.3% in 2024. Additionally, business profits are taxed at ordinary income tax rates, which range from 10% to 37% depending on total earnings. Sellers operating as a business can deduct expenses such as inventory costs, shipping, and platform fees, reducing taxable income.

Hobby vs. Business Selling

The IRS distinguishes between selling as a hobby and operating a business, which affects tax obligations. The frequency of sales, effort put into making a profit, and organization of transactions all contribute to this classification. Someone occasionally selling personal belongings with no intent to generate consistent income is typically considered a hobby seller. However, if a seller frequently purchases inventory with the goal of reselling at a profit, the IRS may classify their activity as a business, even if it is not formally registered.

Being classified as a business requires reporting income on Schedule C (Form 1040), used for sole proprietors and self-employed individuals. Business sellers can deduct expenses directly related to their operations, unlike hobby sellers, who can only deduct expenses up to the amount of income earned. Additionally, business sellers may be required to collect and remit sales tax, depending on state laws. Online marketplaces like eBay automatically collect sales tax in many jurisdictions but do not handle all seller-specific tax obligations.

Sellers who operate at a loss for multiple years may face IRS scrutiny under the “hobby loss rule,” which prevents individuals from continuously deducting losses unless they can demonstrate a genuine profit motive. The IRS generally expects a business to be profitable in at least three out of five consecutive years. If an activity is deemed a hobby, losses cannot be deducted against other income, increasing overall tax liabilities.

Deductible Expenses

Sellers engaged in reselling or operating an online storefront can reduce taxable income by deducting legitimate business expenses. One of the most significant deductions is the cost of goods sold (COGS), which includes the purchase price of items acquired for resale. COGS encompasses direct costs such as wholesale inventory purchases, shipping fees paid to acquire stock, and costs associated with refurbishing or improving an item before resale.

Beyond inventory costs, sellers can deduct expenses related to maintaining and growing their business. eBay charges various fees, such as final value fees, insertion fees, and promoted listing fees, all of which are deductible under ordinary and necessary business expenses. If a seller operates from a dedicated home office, a portion of rent, utilities, and internet expenses may qualify for deduction under the home office deduction, provided the space is used exclusively for business. Additionally, costs related to business insurance, packaging materials, and mileage for trips to the post office or supplier locations can be written off under IRS mileage rates, which stand at 67 cents per mile for business use in 2024.

Recordkeeping Essentials

Maintaining thorough and accurate records is essential for eBay sellers to comply with tax regulations and substantiate deductions. The IRS requires taxpayers to keep documentation that supports income and expenses, which is especially important for those receiving a 1099-K. Without proper records, sellers may struggle to accurately report earnings and could face difficulties if audited.

Sales records should include invoices, receipts, and transaction histories from eBay and payment processors like PayPal. These documents help verify gross sales figures and distinguish between taxable income and non-taxable transactions, such as personal items sold at a loss. Expense documentation is equally important, covering inventory purchases, shipping costs, platform fees, and other deductible business expenses. Sellers should also retain bank statements and credit card records to cross-reference transactions. The IRS generally advises keeping tax records for at least three years, but in cases of substantial underreporting, records may need to be retained for up to six years. Digital tools like accounting software or spreadsheets can streamline recordkeeping.

Consequences for Non-Compliance

Failing to properly report eBay sales or misrepresenting taxable income can lead to financial penalties and increased scrutiny from the IRS. If a seller underreports income, the IRS may impose accuracy-related penalties, which can be 20% of the underpaid tax. If the IRS determines that a seller willfully evaded taxes, fraud penalties of up to 75% of the unpaid tax may apply.

Non-compliance can trigger audits, where the IRS may request detailed records to verify reported earnings and deductions. If a seller cannot provide adequate documentation, the IRS may disallow deductions, increasing taxable income. In extreme cases, persistent tax evasion could lead to criminal charges, carrying potential fines and imprisonment. To avoid these risks, sellers should report income accurately, maintain organized records, and consult a tax professional if uncertain about filing requirements.