Many people sell goods or products at garage sales or on the Internet. Before you consider doing this, it is good to know the tax consequences of any sale.
Generally, if you auctioned a few personal items on eBay and the sale price was less than what you paid for the item (or its depreciated value), you do not have to report this income on your tax return. If your online sales (eBay or some other online service) are the Internet equivalent of an occasional garage or yard sale, you do not have to report the sale on your income tax return. In a garage sale, you typically sell household items you purchased over the years and used personally. If you sell the items for less than you paid for them, the sales are not reportable. Losses on personal use property are not deductible either.
Did you sell an appreciated asset?
However, the rules are different if you sell an appreciated asset. An appreciated asset is something that has increased in value over time. Examples of appreciated assets often include art, antiques, and collectibles. If you have an online auction where the sales price is more than your cost, you usually will have a reportable gain. These gains may be business income or capital gains.
Has your hobby turned into a business?
You may have started an online business if:
- Your online garage sale turned into a business and/or you have recurring sales and are purchasing or producing items for resale with the intention of making a profit, or
- You gain a clientele that continues to purchase goods from you.
Often, people do not realize that they have started an online business. If your hobby has turned into a business, the sales of the items must be reported on your tax return on Schedule C, Profit or Loss from a Business, but you can deduct any bona fide and documented business expenses associated with the production or purchase of the sold items. You will be able to report a loss and then deduct the loss from your income.
If your online sales remain a hobby, your expenses cannot exceed the income from the activity. This means that you cannot report a loss. You can, however, deduct your expenses up to the amount of your hobby income. IRS Publication 535 discusses the factors to consider in determining whether your online sales are a business or a hobby. The hobby vs. business debate matters when it comes to self-employment tax obligations and the ability to deduct operating costs.
For years, the subject of online tax enforcement has been murky, mostly due to the lack of proper paper trails and the undeveloped legal area of online auction income. Recently, however, the IRS has been making moves to crack down on eBay power sellers and auction proprietors to compel the reporting of all business profits. The IRS has also started examining popular online auction sites, such as Amazon and UBid. The IRS now puts pressure, via subpoena power, on major online auction retailers to provide the IRS with user information and sales records. While sellers and the auction sites will resist these efforts, the requirement to report auction income and taxable business earnings is established law. It is only the increased enforcement that is new.
Did the sale result in a net profit?
The question for most people is not the frequency or the dollar amount of the transaction, but whether the sale resulted in a net profit. If it is old stuff that has been used and then piled up in a basement that is sold, there is generally no net profit. Under current tax law, you have to report the sale as income only if you sell an item at a garage sale or online and collect more money than the original purchase price.
This article is from the July-August 2009 issue of Looking Out for Your Legal Rights®.
This information last reviewed 11/2/11.