@vukovar
There are 3 basic ways that eBay sellers can use to report their income for taxes. You will have to figure out which method you want to use to report the gross receipts, based on your own situation.
From what you have said, you would be in situation 1, as outlined below, Selling items you purchased for your own use or collections. You would report the income as a capital gain or loss.
Most eBay sellers prefer to file as a business (situation 2), because the tax treatment is better, but if you don't feel that you are running a business, then capital gains/losses is the way to go. Filing as a "hobby seller" (situation 3) is not really a good choice, for most people. (I can't think of a situation when this would be advisable, actually.)
The IRS, as a default position, considers Online Sellers to be Gig Workers. If you have enough earnings that you are required to file a tax return, then you are required to report all income you received for the gig work, whether the income was reported on a 1099 form or not (for example, if the income was below the threshold, or was from barter or exchange, rather than currency payments).
https://www.irs.gov/businesses/gig-economy-tax-center
Basically, there are three possible situations that eBay sellers may be in; the last two are Gig Workers, and the first one is not, and is for people selling capital assets.
- Selling items you purchased for your own use or collections, or inherited, when you are not operating a business activity.
- If you selling your own personal possessions or investments, you can treat them as capital assets, and file Schedule D (Form 1040), Capital Gains and Losses.
- You can deduct the cost-of-goods-sold from the gross amount you received for the items, to determine if they were a net capital loss or gain.
- Ideally you would have receipts or records to document the cost basis of the items, for the cost-of-goods-sold:
- However, if the items were inherited then you need to use the fair market value on the date they were inherited.
- If you don't have receipts (as for items that were bartered or exchanged, or if receipts are not available) then you can use the fair market value when they were acquired.
- The fair market value needs to be determined consistently, and according to accounting principles.
- For more information, see IRS Publication 551, Basis of Assets.
- Your net income from the sale of capital assets, is your gross income, minus the cost-of-goods-sold as shown on Schedule D. If this produces a net loss, then there is no tax liability (tax owing) on the sales.
- If you have a net capital loss, then you may be able to report the net loss, up to certain limits, and depending on the type of items that were sold and how long you owned them. See the IRS instructions or consult a tax expert for details.
- Acting as a business: If you were selling things that you purchased to resell, and/or if you were selling the items intending to act as a business and make a profit (even if they were originally your personal possessions), then you may qualify to file as a business.
- Here are the guidelines that the IRS uses to determine if an online selling activity qualifies to act as a business:
https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business - You don't need to meet all of these points to qualify, and none of the points are more important than any others. For eBay sellers, perhaps the most important thing they need to do to qualify as a business, is to take actions and make decisions that will increase their chances of making a profit, and be able to demonstrate this if they are audited.
- For example, look for good sources of inventory, and stop using sources that not profitable.
- Businesses can file Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
- You do not need to have an LLC, or a business license, or be registered as a business to use a Schedule C. You just need to qualify according to the IRS guidelines above.
- You can use Schedule C to report your gross income from the business, and to deduct business expense. These can include:
- The cost basis of your items sold as described above for capital gains or losses.
- Other normal and customary business expenses. This can include eBay fees, shipping and packaging costs, rent for office space or inventory storage, etc. See the IRS instructions for details.
- Not-for-profit activity: If you are not filing a Schedule D Capital gains or losses, and if you don't qualify to file as a business (according the the IRS guidelines above), then your activity was considered to be a not for profit by activity the IRS.
- If you don't qualify to file as a business, then you can't use the Schedule C. This will be the case for many eBay sellers who consider themselves to be "hobby sellers". The IRS considers them to be "gig workers" as described above.
- In this case, according to the 2021 Instructions for Schedule C:
- You need to report your gross income from the not-for-profit activity on Schedule 1 line 8i as stated above.
- You can calculate the gross income from the not-for-profit activity according to Publication 535, Business Expenses (section: Not for Profit Activities: Gross Income)
- "You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting."
See page 8: https://www.irs.gov/pub/irs-pdf/p535.pdf
- If you use this method of determining gross income to report on Schedule 1 (Form 1040), line 8i, and the gross income is substantially less than the amount that was reported on your 1099-K, then it is possible that this may increase your chances of being audited.
- If you are audited, you should expect to be asked to show how you determined your gross income. You should be able to demonstrate how you calculated your cost of goods sold, and subtracted that from your gross receipts.
- As long as you calculated the cost of goods sold reasonably and fairly, including the actual cost or fair market value of the goods of sold, and any other expenses, and accurately calculated your gross income, this should be acceptable to the auditor.
