When you sell something online, whether, through an online auction or otherwise, the income tax regulations operate exactly the same way as when you sell something physically. You have income if you sell an item for a profit, which is when you receive more than you bought for it. You incur a loss if you sell something for less than you purchased for it. Depending on the type of internet vendor you are will determine how this income and loss is handled. In this post, Eastcoastlaws.com will outline all you need to know about taxes when you sell things online.
You’re an Occasional Online Seller of Personal Use Property
Through auction websites like eBay or online classified ad services like Craigslist, many people periodically sell stuff online. These sales are the equivalent of the yard or garage sales held online. When you sell used items of personal property online, such as worn-out clothing, you typically lose money—that is, you receive less than you did when you bought them. Losses on the sale of items used exclusively for personal purposes (such as clothing or vehicles) are not deductible as business expenses. You are not required to submit these to the IRS when filing your tax return. Nobody is interested in them. An infrequent seller would have a taxable capital gain that would need to be reported to the IRS if they sold an item for a profit (see the discussion of collectors or investors below).
A hobby is something you do for enjoyment rather than with the intention of making money, like making art or collecting matchbooks. The profit you make from selling anything you made or bought as a hobby online is taxable income that must be shown on your tax return. Prior to the passage of the Tax Cuts and Jobs Act, hobbyists could deduct the full amount of their hobby-related costs from their taxable income. The Tax Cuts and Jobs Act, which is effective from 2018 through 2025, fully eliminates the itemized deduction for hobby expenses as well as numerous other miscellaneous itemized deductions. As a result, taxpayers will not be able to deduct any costs related to their hobbies during these years, but they will still be required to record and pay tax on any hobby-related income.
You’re an Investor
An investor, as opposed to a hobbyist, is interested in making money but is not running a formal business. These people buy real estate in the hopes that it will appreciate in value over time. For instance, an investor coin collector buys coins purely for financial gain—not for fun—by selling or trading them. A capital gain is a sum that is taxable when an investor sells an asset at a profit; this gain must be recorded on IRS Schedule D. Profits are subject to income tax at capital gains rates. The maximum tax rate on net capital gains on the sale of collectibles (such as coins or art) is 28%. In the event that an investor loses money when selling a collectible, the loss is considered a capital loss and can be subtracted from any capital gains made for the year. A maximum of $3,000 of the loss may be deducted from other income and the remaining amount, if any, may be carried forward to subsequent tax years if capital losses outnumber capital gains for the year.
Online Selling Is a Business
The same tax regulations that apply to other businesses apply to you if your firm involves selling goods online. If you frequently sell things online with the intention of making a profit, you are operating a business. Your activity is considered to be a business if you make a profit in any three of the previous five years. Online selling does not have to be your full-time job for it to be a company, but you must consistently work at it.
You can deduct all of your business expenses from your business income if you run an online sales business. Your profits are subject to income tax at ordinary rates. You may deduct losses from other income earned throughout the year. Self-employment taxes (such as those for Social Security and Medicare) must be paid in addition to income taxes when you own a business.