It's that time of year - April 15 is looming. As if I wasn't already thinking about it, the Associated Press ran an article about eBay sellers and whether they were required to report eBay income on their taxes.
How do you know if you are required to report eBay income in your taxes? Barbara Weltman, publisher of the "Big Ideas for Small Business" newsletter and author of several books, including, "J.K. Lasser's Small Business Taxes 2005," said the rule as the tax law states it is that you have to report all income from whatever source derived.
However, an eBay sale may not be income. She explained that if you purchased a designer dress for $1,000 and sold it on eBay for $200, that is a loss.
Whether your eBay selling is a hobby, and the frequency of your sales, doesn't matter, Weltman said. Whether it is income or not is what matters.
Weltman said eBay sellers who do not report their income are missing out on opportunities. It's the right thing to do, and the law, but in addition to helping you sleep at night, reporting income allows you to report expenses, like Internet access fees and all expenses related to eBay selling. There may be an opportunity to take a home office deduction, she said. And, if you show a profit, you can put money in a retirement plan.
Some people are concerned that eBay is cooperating with the IRS, making it easier for the IRS to come after Powersellers.
eBay spokesperson Chris Donlay said, "The IRS would need to provide us with a subpoena for a specific individual before we would provide any data. I don't believe this is something that would be typically done for a routine audit, though it theoretically could happen." He said this is true for both eBay and PayPal.
Where do you learn how to report eBay income on your taxes? Weltman suggested IRS Publication 334, "Tax Guide for Small Business" (http://www.irs.gov/pub/irs-pdf/p334.pdf). She said her newsletter and book, "JK Lasser's Small Business Taxes 2005" (http://www.amazon.com/exec/obidos/ASIN/0471683825/auctionbytescom) can also help.
If you have questions, talk to a tax professional. Additional resources are listed below.
IRS Industry/Profession pages (IRS said they will be adding a section on online auctions):
"Taxes Part One: Do I Have to Report My Auction Earnings?" By Mike Batsimm
"Taxes Part Two - How Do I Report My Auction Earnings?" By Mike Batsimm
IRS Section for Small Businesses and Self-Employed
Is it a Business or a Hobby?
Publication 535 (2004), Business Expenses
IRS Forms and Instructions
Ernst & Young Tax Guide 2005
eBay Radio Interview with Barbara Weltman, August 2003 (Scroll down)
eBay Radio Interview with Barbara Weltman, March 2005 (Scroll down)
UK Article: "Taxman has sights set on eBay traders"
"Australian Tax Office Investigates eBay PowerSellers"