Do you face any tax consequences with these types of sales? Maybe.
The basic rules: If you sell personal items, you have to pay capital gains tax on those wares only if you sell them at a profit. Since most personal items are sold on eBay at a loss — like a garage sale — taxes aren’t usually a problem. You can’t deduct your personal losses, but you don’t have to report the sales proceeds as taxable income, either.
It’s a different story for sales resulting in a profit.
Here are four tips for limiting the tax cost:
1. Build up your tax basis. For eBay transactions, your taxable gain equals the difference between the net selling price and, after adding expenses, your basis (usually, your original cost).
Strategy: Document to prove your basis. The records will come in handy if the IRS ever challenges your return. If you cannot prove your adjusted basis, the IRS may assume that the basis is zero, meaning that the entire amount you receive is taxable.
2. Cut the tax rate on high-end items. Normally, long-term capital gain is taxed at no more than 15 percent, as opposed to ordinary-income rates that reach up to 35 percent. But if you’re selling collectibles such as works of art or rare stamps or coins, those gains are taxed at a much more formidable 28 percent maximum federal rate.
Strategy: Offset the gains with selling expenses. Example: You might incur advertising costs and listing fees that can reduce the gain for collectibles.
Capital gains from personal items sold on eBay are typically reported on Schedule D.
3. Go into business officially. When your business activities on eBay expand, you may file Schedule C as a self-employed individual.
Strategy: Write off your “ordinary and necessary” business expenses. That includes the aforementioned advertising costs and transportation back and forth from flea markets and fairs to peruse the items you might buy and eventually sell.
If you’re operating a business, you might also qualify for home-office deductions if you’ve set aside an area for eBay activities.
4. Safeguard any business losses. Once your activity rises to the level of a full-fledged business, you may be able to write off an overall tax loss for the year.
Strategy: Overcome the “hobby loss” rules. Essentially, that means you must operate the eBay activity like any other legitimate business. Develop a business plan, set up a separate bank account, document all transactions, etc.
If you show a taxable profit for three out of five consecutive years, the IRS generally presumes your activity to be a business rather than a hobby.
Tip: A business that buys and/or sells items over eBay could face state income-tax complications. Consult with your tax pro.