Beware, EBay Sellers - the Tax Man Cometh

What have you sold on eBay? How many things have you sold?

More specifically, Uncle Sam wants to know how much you earned by selling your Santa slippers, antique belt buckles and mint condition baseball cards.

And, more to the point, whether you reported your eBay earnings on your taxes.

The IRS wants to know so badly, in fact, that it's leaning on eBay to report sellers' earnings.

Naturally, eBay is against this. And, just as naturally, so are sellers.

While the Fed expects sellers to report eBay profits - in fact, it's the law - many (if not most) do not. According to the U.S. Treasury, they are due $2 billion (with a "b") in taxes from eBay sellers.

The IRS claims eBay is a broker, and it wants eBay to report any customer that conducts more than 100 transactions per year exceeding $5,000, according to The Financial Times.

Of course, eBay claims it is not a broker, nor an auction house. They claim to only provide an auction service.

The current proposal to would necessitate eBay to begin reporting to the Fed as of January 1, 2008.

Will this proposal make it? Maybe. There's a lot of debate going on Capitol Hill.

How will this affect the majority of eBay sellers? It depends. Casual sellers (those who sell sporadically) probably won't have to worry. Those who use eBay for part-time or full-time income will have to change their business practices by either reporting their profits or using a different service.

That's right - other services. CraigsList.org, for instance, provides free classified listings. CraigsList doesn't offer the customer service nor selling tools, but it's conceivable that many eBay sellers will make the migration.

If the proposal does go through, there will be a virtual ripple effect. CraigsList (and other similar services) will likely see a traffic increase, while eBay will probably see a decrease. This most likely will lead to eBay increasing their listing and/or selling fees. Just as likely, eBay-owned PayPal.com will use all of this to justify an increase in transaction fees.

None of this is good. Not for eBay, not for sellers and not for buyers. The IRS, in fact, will likely only see a temporary windfall until eBay sellers re-model their micro-businesses.

The solution? If one is available, it has to be fair to the Fed, to eBay and sellers.

If eBay is successful in fighting the current proposal, it will probably need to provide a concession to Uncle Sam. But again, this concession would need to be fair to all parties.

The best concession for eBay would be this: just as they notify sellers of the milestones they've reached, they should also be liable to remind sellers of their tax obligations.

While this solution won't convince every eBay seller to report their earnings, it will drastically increase the number who do. This will lead to a steady increase in tax revenue, reduce an "eBay exodus," thus delay any associated fee increases from the online entity.