Leading up to tax time there was a lot of media attention on the possibility that eBay profits may be taxable. To be completely honest, I’m not sure what the uproar is all about. After all, the IRS has always been very clear about the fact that all income, regardless of the source, must be reported. While the AP news story that most of these news reports are based on brings up the issue of whether or not your eBay sales are a hobby as opposed to being a business, this is totally irrelevant with regard to the issue of taxability. Income is income, and it’s subject to income tax. So what does this mean for you?
Well, if you’re anything like me, you mainly use eBay to clean out your closet and, as such, there’s not a whole lot of profit involved. If you’re selling things for less than you paid for them, there’s no profit, and thus no tax liability. But if you do turn a profit you are (technically) required to claim it on your taxes. Of course, you can deduct certain expenses that may help to offset your profits, and this is where the hobby vs. business distinction actually matters — the deductions available to hobbyists are much more limited than those available to someone running a business.
So what’s the difference between a business and a hobby? The IRS makes this determination based on a variety of factors, which are outlined here.
But how will the IRS find you? I have no idea if this is true, but rumor has it that they will be targeting sellers based on feedback scores. Higher feedback = more transactions = higher likelihood of profitability. Will you get caught if you don’t report your eBay income? Maybe, maybe not… The likelihood of getting audited is pretty small, so you may well get away with it. But keep in mind that you’ll be facing facing back-taxes as well as interest and penalties if you fail to pay and get caught.