The internet has brought a new market into the economy known as online shopping. Nowadays, people can shop from anywhere, at any time, from the comfort of their homes, offices, and even while on the move. You think of online shopping and what comes to mind is amazon or eBay. As regards eBay, many who have used this forum to buy and sell merchandise ask: ‘Do you have to claim eBay sales on taxes?’
The Internal Revenue Service (IRS) states that the income generated from online sales sites is considered as taxable income. The IRS rules further state that all your personal and business income must be reported on your personal or business income tax return. In light of this, let’s look at how to report the income from online sales. Shall we?
The IRS guidelines distinguish between businesses making sales and individuals that are making sales from a hobby. The IRS categorizes eBay sellers who are hobby sellers into the same grouping as those who hold a yard sale. In this type of sale, the property is sold for less than the original price.
The difference in the IRS rules is when there is a profit made from any sale. When you make a profit, the IRS rules state that you are classified as a business owner. The taxes that you must pay are then determined by the net realized profit from the sale after the expenses of doing business have been deducted.
EBay sales that are hobby sales must be reported on IRS Form 1040, other income. If you claim expenses from the sale you will also list those on Form 1040 under the standard deductions section. Some of the expenses from hobby selling could be PayPal fees, packaging and mailing fees, and listing fees.
If you are defined as a business by the IRS rules then you must fill out Form 1040, Schedule C, Profit or Loss from Business. You can list your income from the sales and list your deductions from the sales on this form. Your net gain is then transferred to the appropriate section on IRS Form 1040.
One of the deductions for doing business as an eBay business is office expense. If you have a home office, or use part of your primary residence as your office, you can deduct that part of the household expenses on Schedule C. You can claim your automobile expenses that are related to generating income for the business such as miles driven to pick up or send out merchandise.
If you have fees for listing, taxes, legal fees, accounting fees, and postage, these are allowable deductions for your business. You will total all the expenses and deduct them from the gross sales of your business to arrive at the net taxable income for the business.
You must have accurate records for either hobby selling or business selling whether these occur on an online or offline site. You must record all income and all expenses in order to claim them on your return. If you are audited by the IRS, you will need to produce documentation that supports your claim. If you are using part of your home as an office, keep a copy of the floor plan. If you are claiming mileage on your vehicle keep a log of the miles driven and the purpose of the trip.
The IRS has mandated that beginning in the tax year 2011, PayPal will be required to send a Form 1099-K to those sellers that have met guidelines established by the IRS for reporting. If you have sales greater than $20,000 or you have more than 200 individual transactions through PayPal you will receive this form and the information will be reported to the IRS.
If you fit this category, you should receive your Form 1099-K in mid-January. Having said that, the answer to your question ‘Do you have to claim eBay sales on taxes?’ is a definite yes!