Do I Need to Pay Taxes on Things I Sell Online?
A recent Wall Street Journal article highlighted the IRS's increased scrutiny of side hustles, emphasizing the need for accurate reporting. The rise of online marketplaces has opened up exciting opportunities for individuals and businesses alike. Whether you're decluttering your closet through Poshmark, selling handmade crafts on Etsy, or running a full-fledged e-commerce store, it's crucial to understand the tax implications of your online sales. Let’s take a look at what is required if you’re selling things online.
What if eBay or Etsy Sends Me a 1099-K Tax Form?
One of the most significant changes impacting online sellers is the evolving threshold for receiving a 1099-K tax form. This form, issued by online platforms like StubHub, Etsy, and eBay, reports your total online transaction volume to the IRS. For 2024, if you earn over $5,000 selling goods or services online, you should expect to receive a 1099-K. This threshold is set to decrease even further in the coming years, dropping to $2,500 for 2025 and a mere $600 for 2026. These changes mean that even small-scale sellers will likely receive this form, making accurate reporting essential.
It's important to note that receiving a 1099-K doesn't automatically mean you owe taxes on the entire amount. The form simply reports your gross sales volume. Your actual tax liability depends on several factors, including your cost of goods sold, the nature of your selling activity (business vs. hobby), and the type of items you're selling.
Business vs. Hobby: Understanding the Distinction
The IRS distinguishes between businesses and hobbies when it comes to online sales. If you're operating a business with the goal of making a profit, you'll be classified as a business owner. This means you'll need to report your income and expenses on Schedule C of your tax return and pay both income tax and self-employment tax. Self-employment tax covers Social Security and Medicare contributions.
On the other hand, if you're selling items occasionally or as a hobby, without the primary intention of making a profit, you'll be considered a hobby seller. While hobby income is still taxable, it's not subject to self-employment tax. However, you also can't deduct losses from hobby activities. For instance, if you sell a personal item for less than you originally paid for it, you wouldn't owe tax on the sale, but you also couldn't deduct the loss. It’s still crucial to report this income to the IRS, even if you don’t owe taxes on it.
Tax Implications of Different Types of Online Sales
The type of items you sell also impacts your tax liability. Income from hobbies is subject to regular income tax. However, if you're selling collectibles like comic books, trading cards, or other similar items, you might be subject to capital gains tax. The tax rate for capital gains depends on how long you owned the item. If you owned it for less than a year, the gain is taxed as ordinary income. If you owned it for more than a year, you'll generally pay the lower capital gains tax rate.
For businesses, profits are subject to regular income tax, and as mentioned earlier, self-employment tax also applies. Understanding these nuances is crucial for accurate tax reporting.
How to Report Online Sales on Your Tax Return
The method for reporting online sales depends on whether you're a business or a hobby seller. Hobby sellers will typically report their profit or loss on Schedule 1 (Form 1040), Additional Income and Adjustments to Income. If you have capital gains, you'll also need to file Form 8949 and Schedule D.
Businesses, on the other hand, will report their sales on their business tax return or Schedule C of their personal tax return. Accurate record-keeping is essential for businesses to track income and expenses and ensure compliance with tax regulations.
Do I Need to Pay Taxes on My eBay and Poshmark Sales?
The short answer is maybe. If you sold more than $5,000 on an online auction site or through an e-commerce platform, you’ll receive a 1099-K form that lists your gross sales. Depending on whether you’re an individual clearing out your closet or a business running an online store, your tax liability will vary. Selling an old watch on eBay or a few crafts on Etsy might not make you subject to additional income tax, but it’s always smart to talk with a CPA to make sure.
Navigating Taxes on Online Sales
Navigating the complexities of online sales taxes can be challenging. At Callison CPA, we have the expertise to guide you through these regulations and ensure you meet all your tax obligations. We can help you determine the appropriate tax treatment for your online sales, maintain accurate records, and prepare your tax returns. Contact us today for a consultation and let us help you simplify your online sales taxes.