Q&A – Do I report my eBay activity as a hobby or business?
March 10, 2007 · Print This Article
Recently, a subscriber to the ‘Tax Tips for eBay Sellers’ special report asked:
Q. I’m somewhat confused on the "hobby" vs "business" debate. I made about $5,000 on eBay last year. I wasn’t really conducting myself in a business like manner – it wasn’t a regular thing, it was just something fun I liked to do. But I knew I was making money at it, as well. Basically, I just don’t know how I am supposed to file this. Do I report my eBay income as a hobby or a business?
A. If you were just selling on eBay as a hobby, your income is reported on line 21 (Other Income) of Form 1040. Expenses relating to your hobby income are deducted on Schedule A, as a miscellaneous deduction, subject to the 2-percent floor.
This means if you do not itemize you could lose the ability to deduct any expenses against your hobby income; and even if you do itemize, you can only deduct the amount of expenses that exceed 2 percent of your adjusted gross income. This is the least favorable tax treatment of your eBay income.
If you were selling collectibles (artwork, stamps, coins, etc.), then you report your gain on the sale on Schedule D, Capital Gain or Loss. The capital gains rate for collectibles is 28 percent. Losses are not deductible.
Finally, if you were selling on eBay with the intent to make a profit, and you are a sole proprietor (not incorporated, and not a partnership), then you should report your eBay income on Schedule C, Profit or Loss from Business.
Your net profit is subject to income taxes and self employment taxes when you are a sole proprietor, but you are allowed to deduct reasonable and necessary expenses, such as the cost of inventory, shipping supplies, business use of your car, expenses associated with the business use of your home, and more.
Because you are able to deduct expenses against your eBay income, reporting your income on Schedule C is generally the most advantageous for eBay sellers.
For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.
Tags: income tax on ebay profit, ebay tax, ebay hobby or business
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Keep in mind though, If you decide to be a ‘business’ and not a ‘hobby’ you need to keep very good records. Additionally, as a business, if you have losses (which you can write off when you are a business) for more than 2 out of 5 yrs the IRS will possibly flag you for an audit.
Thanks for the comment Madeleine! And you are correct, good records are a must if you are a small business owner. Keeping good records will make sure you get all the tax deductions you are entitled to, and it will help you know where your business is at all times.