Many people ask me if they are required to report the profits they earn on items they sell on eBay on their income tax return. In short, yes. If you sell items on eBay for a profit, then you should report your eBay sales on your income tax return, and you may owe income taxes on any profits. It doesn't matter if its just a hobby or if you are trying to build a business - if you earned a profit, its taxable income. Generally, any income you receive from all sources is subject to income tax unless it is specifically exempt by law (hint: eBay profits are not exempt). You must file a tax return if your net earnings from self employment are $400 or more.
You are self employed if you carry on a trade or business for profit. If you are selling on eBay with the intent of making a profit, then you are self employed. To report your eBay earnings, you should file Form 1040, and attach Schedule C or C-EZ. Schedule C is used to calculate your net profit or loss from your business, which is then reported on your Form 1040.
This is assuming you are a sole proprietor. If you are incorporated, you have to file a separate business return. You will file Form 1120 or Form 1120s (for S Corporations). If you are a partnership, you will file Form 1065.
At this point, you may be thinking 'I don't run a business; I just sell on eBay as a hobby'. Unfortunately, income from hobbies is taxable as well. You should decide before you even start selling on eBay if you will be running a business, or if this will just be a hobby, or if you are just selling off collectibles.
Each choice has its own tax consequences and its own reporting requirements. If your eBay income is a hobby, you still report your income and expenses, but you are not allowed to deduct expenses in excess of your income. Your hobby income is reported on line 21 of Form 1040; expenses are reported on Schedule A as a miscellaneous deduction, subject to the 2 percent Adjusted Gross Income (AGI) floor. This means if you do not itemize you could lose the ability to deduct any expenses against your hobby income, and even if you do itemize, you can only deduct the amount of expenses that exceed 2 percent of your AGI.
If your eBay income is from the sale of collectibles (artwork, antiques, stamps, coins) then you will report the gain from your sales on Schedule D. The capital gain tax rate for collectibles is 28 percent. Losses on the sale of collectibles are not deductible. As you can see, it is very important to decide how you will be treating your eBay activity so you'll know your tax responsibilities from your activity from day one.
Kristine McKinley is a CPA and Certified Financial Planner. For more information on eBay taxes, sign up for our free special report 'Tax Tips for eBay Sellers'. http://beaconfinancialtips.typepad.com/ebaytaxtips/2007/02/free_special_re.html