The income you get from selling items on eBay is just like the income you get from any other business: it is taxable. Therefore you should be reporting that income and you should be paying tax.
Income is Income.
If you make money from it, then it’s income – and if it’s income, then it’s taxable. There is a question of scale involved, though, where the more you’ve sold, the more important it is to declare your eBay income. If you don’t, you risk getting yourself into all sorts of trouble.
There are some rules for deciding whether your income counts as hobby or business income. If you depend on the income you get from eBay, spend a lot of time on it, or conduct your sales as a business, then you need to file a Schedule C tax form and pay tax as a business.
How Do I Work Out How Much to Pay?
The income you make from eBay is how much profit you make. Remember that, if selling on eBay is your business, you can generally subtract your costs from this income, like this:
Sale price – cost of item – eBay fees – PayPal fees – cost of postage – cost of packing materials = income.
For example, let’s say you sell CDs for $10 each, including shipping. You pay $5 for the CDs at wholesale. That’s $10 – $5 (cost) – 25c (insertion fee) – 52c (final value fee) – 30c (PayPal fixed fee) – 29c (PayPal percentage fee) – 37c (stamp) – 50c (packaging) = $2.77 income.
For reference, eBay’s final value fee on a $10 item is 5.25%, while PayPal’s cut is 30c + 2.9% for most sellers. These numbers will vary depending on the value of what you sell and the kind of account you have.
When you work this out at the end of the year, you can calculate your overall price for all sales, and then work out how much of that you actually received, remembering to adjust for non-paying buyers. Then just subtract what you spent on shipping and packing. It is always advisable to keep a printed record of everything you buy and sell.
However, there could be a few advantages to paying tax on your eBay sales – you might be able to make it back through deducting tax on your business expenses. All of the costs in the sum above that aren’t profit are business expenses and so are generally tax-deductible. You may also be able to deduct a percentage of the cost of any computer equipment you buy, as well as ink and paper for your printer. Be sure to consult with your tax professional for more guidance about your specific situation.
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As an Enrolled Agent, Jim is a federally-licensed tax practitioner with unlimited rights to represent clients before the Internal Revenue Service. This means he is unrestricted as to which taxpayers he can represent, what types of tax matters he can handle, and which IRS offices he can represent clients before. Enrolled agent status is the highest credential the IRS awards.