Tax Tips for Online Sellers: Do You Owe Income Tax on Those eBay Sales?

Are You Holding an Online Garage Sale?

If you sell only occasionally, the way you would hold a garage sale at your home, you may not have reportable sales. As with a real garage sale, you are usually selling the items at bargain prices compared to the purchase price, in order to attract buyers. In other words, you are selling at a loss, therefore no income tax is owed. You should also know that losses from the sale of personal property are not deductible.

If you sold appreciable assets online, such as art, collectibles, or antiques, and you sold them for more than you paid for them (including money you paid to have them delivered, restored, mounted, or otherwise improved) you may have a taxable gain.

If you sold depreciable business assets you may have capital gains, ordinary gains, or depreciation recapture that you must report. Let's say you had a regular brick-and-mortar store which included expensive equipment for use in the store (as opposed to inventory for sale in the store). You claimed depreciation on that equipment, getting a tax benefit. Soon after, you closed the store, and sold the equipment in an online auction. If you paid $5,000 for the equipment originally and claimed depreciation of $5,000, the equipment on your books had no value from a tax standpoint. If you then sold the equipment (which you've already fully written off on your taxes) whatever price you receive may generate a tax liability.

Are You Operating a Home-Based Online Auction?

Suppose you started out in "online garage sale" form, just selling a few unwanted items out of your closet. But now you are making recurring sales, and buying things to resale hoping to make a profit. If so, you may have crossed over to being an online auction business. That means, of course, that you have reportable sales for income tax purposes. The good news is, if you have a viable online auction seller business, you can deduct business expenses against those sales.

Beware the Home-Based Business Tax Schemes

The IRS wants operators of home-based businesses to be aware of tax schemes that seek to target this kind of business owner. If you fall into this category, don't be fooled by those who claim you can deduct most or all of your personal expenses against your business income. The IRS is aggressively pursuing and prosecuting those who promote these illegal practices. Those who participate in such schemes and scams may have to pay the taxes along with penalties and interest, and may also be subject to fines and imprisonment. Even innocent taxpayers may have to pay hefty fines and penalties. The IRS advises that if you are involved, you need to correct your returns.