How Does Your EBay Business Affect Tax Season?

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Over the last several years, eBay has become a valid business tool for selling anything from old office equipment to product inventory. In the early years, it was like the “Wild West”, with little protection for either the buyers or sellers. The site has evolved since then, adding those protection guarantees. In addition, eBay has added structure and policies that must be followed in order to receive those guarantees.

What are the rules?
There is one big topic that seems to be missing from online forums and small business financial “how to” articles: What are the IRS’ rules regarding the eBay sales for your business? How do these rules affect you when it comes time to pay the tax man?

What is considered business income by the IRS?
The most basic interpretation of the IRS rules are pretty clear: you must pay taxes on all personal and business income, which includes any item you sell on eBay. This income can be offset somewhat by the following:

  • Selling price compared to buying price (overall profit or loss)
  • eBay listing and final value fees
  • PayPal fees
  • Shipping fees
  • Other fees associated with selling or shipping the items

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If the overall amount you made on eBay is zero or negative after adding in all these factors, you may not be required to report the income. If you have any doubt, it is better to report the complete numbers and let the IRS figure it out. You can also consult someone who has earned a degree in accounting to help you get it right.

What about tax implications of domestic vs. international sales?
As a general rule, you do not need to charge sales tax for an international sale. Many countries charge a value-added tax (VAT) to the buyer that will be assessed at customs, and is the responsibility of the buyer to pay. There may be extra taxes you must pay for selling internationally, but this is more complex and can best be addressed by an accountant who is versed in this business practice.

Is your hobby is a business?
If you sell anything on eBay using your personal finances, there are some factors that the IRS may use to determine whether or not this is considered a business:

  • Does your hobby have the appearance of a business? This can come from selling many of the same items, or having an eBay store front. Even using the same disclaimer on all auctions that has business-life jargon can turn your hobby into a business in the eyes of the IRS.
  • How much time and effort do you spend on your eBay sales? This is a very ambiguous question, but the IRS will look at the time you spend as a factor, and the more time you spend, the closer your hobby is to a business.
  • Does this income help to pay the bills? The IRS will dig deep to answer this question. If the answer is yes, then your hobby is indeed a business, and you will be required to pay taxes on the money you make from eBay sales.

Does eBay have any responsibility to the seller or the IRS when it comes to taxes?

EBay considers itself a tool or service that allows for selling and buying on the Internet.  They provide methods to track your sales, and options to charge sales tax. You are on your own when it comes to IRS income reporting, as eBay does not send any tax forms to you or the IRS. Keep good records, and make use of the eBay seller tools to minimize your headaches at tax time.

If your small business already employs a CPA or accounting consultant, these are all good questions to ask when determining whether or not you should sell on eBay. If you are already doing so, make sure your practices meet the IRS guidelines, and you can help to minimize your chances of audit or assessment of extra taxes!

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Nick Barnett

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