Is eBay Money Income?
The short answer is yes. The money you received from selling items online is, indeed, income. If you have no receipt or other documentation to prove the amount you originally spent on the item, everything you received from selling it is considered profit. In this instance, it is as if you got the item for free and sold it for 100% gain, incurring no additional expenses along the way.
Nothing in this world is free. So we will assume you did not obtain the item for free. How do you convince the IRS of this if you lost your original receipt? Give your inventory value. On your taxes, when valuing your inventory (the stuff you have sold or have available for sale) you can choose to use the exact amount you paid for something or the fair market value – which ever is less. This means, if you no longer have the receipt documenting what you paid for that old television you sold, you can use the fair market value. It is unlikely the fair market value would now be greater than what you originally paid for it. Research similar items on a site like eBay. Average the prices the similar items are going for to come up with the fair market value for your item.
In order to keep accurate records of how you came up with your value in the case of an audit, it is advisable to print out a few pages showing similar items being sold at the same price at which you valued your item.
Now, we need to factor in the fees you incurred to list the item for sale. Don’t forget the amounts you spent on packaging supplies and postage to mail the item once it sold. All of these expenses may be added to the cost of your item. Now, subtract all of that from what you received from the buyer. If you ended up with a negative number, you actually lost money. Any positive number you are left with is your profit. Now, do this for every item you listed and/or sold this year and add it all up. If you made a profit, you are in business.
Net Operating Loss
If you had net earnings (after expenses) from self-employment (selling online, for instance) of $400 or more in a given tax year, you must report it. Even if you had less than $400 in self-employment income, it may be to your advantage to file. If, with deductions, you get your self-employment income down to a loss, you may be able to offset other income earned by you or your spouse. If you have made quarterly, estimated payments, you may be due a refund.
When claiming internet income, you will need to file a Schedule C, along with your 1040. Schedule C is where you will account for both your business income and expenses. It is a form which basically walks you through the steps of determining profit discussed above. If you get to the end of your Schedule C, and the remaining number is negative, you have what is called a net operating loss. This simply means you lost money this year; the cost of doing business was more than the income. The IRS understands that businesses, especially in their start-up years, may not always make a profit.
Hobby or Business
What if you lost money, but you were truly trying to make a go at an online business? If you make a profit, you are in business. If you continuously lose money, however, you risk having your business activity classified as a hobby. The IRS sets several guidelines to determine whether they think you are a business or indulging your hobby at a discount. You do not necessarily have to make money, but must show you are making an honest effort to do so.
3 Out of 5 Rule
One thing the IRS looks at to determine your intentions is to examine the past five years of your business. If you have made a profit in three out of five consecutive years, the IRS considers your venture a legitimate business. So, in essence, you may claim a loss for at leas the first two years before anyone bats an eyelash. However, this is not the only thing the IRS studies.
If you fail the 3 out of 5 rule, but can still prove you are actively pursuing profit, you can still be classified as a business. Ways to do this include advertising, keeping good business records, past success in a similar business, having a business license (which isn’t necessary to be considered a business with the IRS in the first place, by the way), courses taken to improve your skills, and if this is your sole source of potential income, because that proves financial need.
Why Does it Exist?
The hobby rule exists to keep people from indulging their hobbies by continuously offsetting their other income with business losses. Even online selling can be considered a hobby if you keep losing money at it.
What if it is a Hobby?
What if you never make a profit from online selling? What if the IRS decides to classify your business venture as a hobby? In this case, not all is lost. You may then still deduct some of your expenses, as long as those expenses do not create a loss. The deductions you may take from hobby expenses are filed on a Schedule A (instead of taking the standard deduction) and are subject to the 2% floor on miscellaneous personal deductions. Hobby income is reported on line 21 of your 1040 (other income).
The short answer is yes. The money you received from selling items online is, indeed, income. If you have no receipt or other documentation to prove the amount you originally spent on the item, everything you received from selling it is considered profit. In this instance, it is as if you got the item for free and sold it for 100% gain, incurring no additional expenses along the way.
Nothing in this world is free. So we will assume you did not obtain the item for free. How do you convince the IRS of this if you lost your original receipt? Give your inventory value. On your taxes, when valuing your inventory (the stuff you have sold or have available for sale) you can choose to use the exact amount you paid for something or the fair market value – which ever is less. This means, if you no longer have the receipt documenting what you paid for that old television you sold, you can use the fair market value. It is unlikely the fair market value would now be greater than what you originally paid for it. Research similar items on a site like eBay. Average the prices the similar items are going for to come up with the fair market value for your item.
In order to keep accurate records of how you came up with your value in the case of an audit, it is advisable to print out a few pages showing similar items being sold at the same price at which you valued your item.
Now, we need to factor in the fees you incurred to list the item for sale. Don’t forget the amounts you spent on packaging supplies and postage to mail the item once it sold. All of these expenses may be added to the cost of your item. Now, subtract all of that from what you received from the buyer. If you ended up with a negative number, you actually lost money. Any positive number you are left with is your profit. Now, do this for every item you listed and/or sold this year and add it all up. If you made a profit, you are in business.
Net Operating Loss
If you had net earnings (after expenses) from self-employment (selling online, for instance) of $400 or more in a given tax year, you must report it. Even if you had less than $400 in self-employment income, it may be to your advantage to file. If, with deductions, you get your self-employment income down to a loss, you may be able to offset other income earned by you or your spouse. If you have made quarterly, estimated payments, you may be due a refund.
When claiming internet income, you will need to file a Schedule C, along with your 1040. Schedule C is where you will account for both your business income and expenses. It is a form which basically walks you through the steps of determining profit discussed above. If you get to the end of your Schedule C, and the remaining number is negative, you have what is called a net operating loss. This simply means you lost money this year; the cost of doing business was more than the income. The IRS understands that businesses, especially in their start-up years, may not always make a profit.
Hobby or Business
What if you lost money, but you were truly trying to make a go at an online business? If you make a profit, you are in business. If you continuously lose money, however, you risk having your business activity classified as a hobby. The IRS sets several guidelines to determine whether they think you are a business or indulging your hobby at a discount. You do not necessarily have to make money, but must show you are making an honest effort to do so.
3 Out of 5 Rule
One thing the IRS looks at to determine your intentions is to examine the past five years of your business. If you have made a profit in three out of five consecutive years, the IRS considers your venture a legitimate business. So, in essence, you may claim a loss for at leas the first two years before anyone bats an eyelash. However, this is not the only thing the IRS studies.
If you fail the 3 out of 5 rule, but can still prove you are actively pursuing profit, you can still be classified as a business. Ways to do this include advertising, keeping good business records, past success in a similar business, having a business license (which isn’t necessary to be considered a business with the IRS in the first place, by the way), courses taken to improve your skills, and if this is your sole source of potential income, because that proves financial need.
Why Does it Exist?
The hobby rule exists to keep people from indulging their hobbies by continuously offsetting their other income with business losses. Even online selling can be considered a hobby if you keep losing money at it.
What if it is a Hobby?
What if you never make a profit from online selling? What if the IRS decides to classify your business venture as a hobby? In this case, not all is lost. You may then still deduct some of your expenses, as long as those expenses do not create a loss. The deductions you may take from hobby expenses are filed on a Schedule A (instead of taking the standard deduction) and are subject to the 2% floor on miscellaneous personal deductions. Hobby income is reported on line 21 of your 1040 (other income).
Regardless, you must keep records of your income and expenses. If you are ever audited, and the IRS finds you had internet income, you will need to be able to prove the expenses associated with that income. Otherwise, the taxes and penalties may be heavy.
This and other information may be found in the book listed below.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
Copyright 2007 -2008
