Here’s what HIVE AI had to say about “Do I need to report income from selling items online (e.g., eBay)?”:

Reporting Income from Selling Items Online (e.g., eBay)

Yes, you generally need to report income from selling items online, but the specific reporting requirements depend on whether you’re selling personal items at a loss, personal items at a gain, or operating an online selling business.

Online Sales as a Business

If you’re regularly selling items online as a business activity, you must report all income:

Generally, income earned from the gig economy is taxable and must be reported to the IRS. The gig economy is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. Taxpayers must report income earned from the gig economy on a tax return, even if the income is from part-time, temporary or side work, not reported on an information return form like a Form 1099-K, 1099-MISC, W-2 or other income statement, or paid in any form, including cash, property, goods or virtual currency. IRS Newsroom – IR-2022-45

If you’re operating an online selling business, you’ll need to:

• Report your income on Schedule C (Profit or Loss from Business)
• Pay self-employment tax if your net profit exceeds $400
• Keep detailed records of all sales and expenses

A real-world example from a Tax Court case shows the consequences of not reporting online sales income: A taxpayer and his wife filed a joint tax return but did not include a Schedule C for the taxpayer’s eBay coin dealer business. The IRS determined, based on the Form 1099-K supplied by PayPal, that the taxpayer had received $37,013 from third-party network transactions. The IRS treated a portion of this as unreported income and determined a tax deficiency. Dawson U.S. Tax Court Opinions: Thomas R. Huzella & Carole L. Huzella, Deceased Dawson U.S. Tax Court Opinions: Thomas R. Huzella & Carole L. Huzella, Deceased

Selling Personal Items

The tax treatment differs when you’re selling personal items rather than operating a business:

Personal Items Sold at a Loss

If you sell personal items for less than you paid for them, you generally don’t need to report the sales as income. For example, if you bought a refrigerator for $1,000 (the purchase price) and sold it for $600 (the sales price), you have a loss of $400. You would enter $600 on the line at the top of Schedule 1 to report the personal item sold at a loss. IRS – Publication 4491-X: VITA/TCE Training Supplement

Personal losses on the sale of personal-use items are generally not deductible.

Personal Items Sold at a Gain

If you sell personal items for more than your cost basis (what you paid for them), you need to report the gain as income. This would be reported as a capital gain, typically on Schedule D and Form 8949.

Occasional Sales vs. Business Activity

The distinction between occasional sales of personal items and a business activity is important:

No single factor or set of factors is conclusive in determining whether an activity is engaged in for profit. All facts and circumstances with respect to the activity must be taken into account. For example, in one Tax Court case, the court determined that the taxpayers “did not engage in the business of buying and reselling items for profit. The Hunters had no background or expertise in this area and they did not research the items they were buying or the appropriate price at which to list the item on eBay.” Dawson U.S. Tax Court Opinions: Paul Hunter & Janet Hunter Dawson U.S. Tax Court Opinions: Paul Hunter & Janet Hunter Dawson U.S. Tax Court Opinions: Paul Hunter & Janet Hunter

Marketplace Reporting Requirements

Online marketplaces may be required to report your sales to the IRS:

It’s important to know that if you’re getting payments for doing a side hustle, running a small business, or selling things online, that money should be reported as income. And if you received over $20,000 and had over 200 transactions in 2023 and previous years through payment apps and online marketplaces, you and the IRS could receive a Form 1099-K. IRS – Publication 5731-B (zh-s): Are you making money selling things or providing a service? (Chinese-Simplified Version)

However, even if you don’t receive a Form 1099-K, you’re still required to report taxable income from online sales.

What’s Not Taxable

Not all money received through online platforms is taxable:

For example, if you and a friend went to a concert, and your friend reimbursed money to you for her concert ticket through an online application, and you get a Form 1099-K for the reimbursement, this would generally not be taxable to you because the money is not payment for the sale of goods or the provision of services. IRS – Publication 4491-X: VITA/TCE Training Supplement

Special Situations

Selling Wedding Gifts or Personal Items

In one Tax Court case, a taxpayer claimed, “I didn’t have receipts. I sold wedding gifts. I had gift cards. I said well, I didn’t pay anything of [sic] these gift cards from my wedding, so I guess I just take all of that as a loss. They said no. The basis is the gift card.” Dawson U.S. Tax Court Opinions: Andrea Fabiana Orellana

This illustrates that when selling gifted items, your basis is generally the value of the gift when you received it.

Fees Paid to Online Marketplaces

You should include all fees (e.g., selling fees, payment processing fees, etc.) associated with the sale of your personal items in your basis when computing your gain or loss on the sale. IRS – Publication 4491-X: VITA/TCE Training Supplement

Record-Keeping Requirements

Regardless of whether you’re selling as a business or occasionally selling personal items, good record-keeping is essential:

In another Tax Court case, a taxpayer “testified credibly that she sold jewelry as a business. She identified several deposit entries in her bank statements that corresponded to PayPal receipts for the sale of her jewelry. She also guessed that each piece of jewelry cost her about $100 to make.” Dawson U.S. Tax Court Opinions: Octavia Nakia McClain

The court noted that “even if we were to believe that $10,450 was the correct amount of the gross receipts for the three businesses, a proposition of which we are dubious given the time that has elapsed since 2011, we are unable to determine the net, or taxable, income from the three businesses. Taxable income is equal to gross income minus deductions. Cost of goods sold is subtracted in calculating gross income. It is not a deduction. Cost of goods sold is the cost of buying or manufacturing a product.” Dawson U.S. Tax Court Opinions: Octavia Nakia McClain

This highlights the importance of maintaining accurate records of both your sales and the costs associated with those sales.

Conclusion

To summarize the reporting requirements for online sales:

• Business Sales: If you’re regularly selling items online as a business, report all income on Schedule C, regardless of whether you receive a Form 1099-K.
• Personal Items Sold at a Loss: Generally not reportable as income, and the loss is not deductible.
• Personal Items Sold at a Gain: Report the gain as income, typically as a capital gain.
• Record-Keeping: Maintain detailed records of all sales, costs, and expenses, including marketplace fees.
• Form 1099-K: You may receive this form from payment processors if your sales exceed certain thresholds, but you must report all taxable income even if you don’t receive this form.

Remember that the IRS can detect unreported income from online sales through various means, including information from payment processors and online marketplaces. Proper reporting of all taxable income is legally required.

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