Do You Need to Report Your Online Sales to the IRS?
Online sellers, including those selling through online sales websites such as eBay.com, are responsible for reporting sales income in their income tax returns. Here are some points with examples that sellers should keep in mind in tracking taxes on online sales:
Online 'Garage Sales'
Online sales of personal, used items do not generally have to be reported. Selling your old bicycle on craigslist is an example of these types of sales. Losses on personal use property are not deductible on online sellers' tax returns.
Determining Whether Sales Are Hobby or Business
Income made from online sales can be reported to the IRS as "hobby income" if the sales activity qualifies as a hobby according to the IRS, i.e. sale without the intention of making money. For example, a recreational photographer selling a photo on eBay should report the sale as hobby income. One test is whether the seller has made no profit from the hobby in two of five consecutive years. If the income does qualify as a hobby income, sellers can deduct hobby expenses from the income but cannot use hobby losses to offset other non-hobby income.
Home-Based Online Auction Sales Businesses
Where there are recurring sales involving purchase of items for resale with the intention of making a profit, sellers may be a small business and are subject to business taxes. For example if you start selling greeting cards online and then begin filling orders from regular clients and continue expanding your online inventory you likely have an online business. Viable online sales businesses are entitled to deduct certain business expenses. If the online sales are part of an established business, the sales should be included as business income.
Reporting Profit on Appreciated Assets Sold Online
Reportable gains on online sales of items such as antiques, art, and collectibles should be reported to the IRS where the sales price is more than the cost of the item. If, for example, you sold a vintage automobile online for a profit, you should report this gain. Depending on the nature of the online sale, the gain may be reported as business income or capital gains.
Reporting Loss on Depreciated Business Assets
Sale of depreciated business assets, such as selling cookbooks on Amazon.com used in a catering business, or closing of the business altogether may require reporting of capital gains, ordinary gains, and depreciation recapture.