Online entrepreneurs who believe that internet revenue isn’t taxable are in for a shock next year. That’s when credit card companies and groups such as PayPal must start reporting merchant sales to the IRS. Here’s the bottom line. It doesn’t matter where you do business. You can sell items in a storefront or on eBay. Income is income and the same rules apply. If you are selling a used TV in a yard sale, no one expects you to report that sale on your tax return. If you buy computers and resell them at a profit, that is income and must be reported. If you are selling art or antiques that have gone up in value significantly since you purchased them and sold them for a profit, it must be reported.
In a recent US Tax Court case, an IRS agent was trading on Ebay, with approximately 1200 transactions over a two-year period. She did not include any income or expenses from this activity on her Federal tax filing. The IRS determined that she had unreported income in excess of $32,000. The taxpayer argued that many of the items sold were her own personal property that she paid considerably more for than what she received when the items were sold. She explained that she liked designer clothes for which she
would pay over $350 but might get only $50 when sold. However, she never kept her original purchase receipts. The Court ruled in the IRS’s favor, noting that the burden was on the taxpayer to produce the receipts and prove that the original cost of the items exceeded the amount of income from the sales. The Court had little sympathy for the taxpayer’s arguments, given that she was an IRS Officer. The lesson in this case is that the taxpayer did not keep adequate records, consequently, she lost the case.
Another factor to consider is whether or not items you sell were depreciated for tax purposes in a prior year. The sale of office equipment or vehicles that were used for business and were subject to prior depreciation may result in a required recapture of depreciation, taxed as ordinary income.
A distinction must be made between an online business and a hobby. A person who buys items for resale and is trying to make a profit in online auctions may have a legitimate business. If your online sales are a hobby, the expenses cannot exceed the income from sales for tax loss purposes.
Don’t be afraid to clean out your attic and sell the items on eBay, just make sure to keep good records.
