Even if you're just a casual seller on eBay or a similar Internet auction service, you still must deal with tax consequences.
Basic rule: When selling personal items, you won't need to pay capital gains tax unless you sell the item at a profit. Since most personal items sold on eBay—as at garage sales—are sold at a loss, taxes usually aren't a problem. (Personal losses aren't deductible.)
But what if you do sell for a profit? Here are four tips to limit your tax cost:
1. Build up your basis to reduce your gain. Your taxable gain on eBay transactions is the difference between the selling price and your basis (usually your original cost). If you can't prove your adjusted basis, the IRS may assume it's zero, meaning the entire amount you receive will be taxable. Strategy: Keep documents on the basis of the items.
2. Cut your tax profit down to size. Normally, long-term capital gain is taxed at a top 15 percent federal rate. But if you're selling collectibles, gains from those items are taxed at a maximum 28 percent tax rate.
Strategy: Don't forget to offset your taxable gain with selling expenses. For example, you might incur advertising costs and listing fees. Gains from items sold on eBay are typically reported on Schedule D.
3. Go into business for yourself. When your business activities on eBay expand, you may file Schedule C as a self-employed individual.
Strategy: Offset the income with de-ductible expenses. Don't forget to write off transportation expenses if you travel to yard sales or flea markets to peruse the items you will buy and eventually sell. You may also be entitled to a home-office deduction if you set aside room for your eBay activities.
4. Safeguard your business tax losses. Depending on the nature of your eBay activities, you may be able to show a deductible business loss for the year.
Strategy: Prove you have a legitimate business to avoid the "hobby loss" rules. To overcome this objection, run your eBay activities in a businesslike manner. Develop a business plan, operate a separate bank account and document all activities. Note: Your venture is a presumed a legitimate business if you've shown a profit in three out of the last five years.