eBay Selling & Your Tax Return: Part 1, The Casual Seller

With more than 233 million registered users, eBay is the world's largest marketplace. Millions take advantage of this on-line venue to sell anything and everything -- from junk around the house to diamond rings, cars, and forklifts.

Just because sales activities are on-line, doesn't mean they are invisible. You still need to know the tax rules to follow in reporting your eBay sales.

When you sell items on eBay, the tax law may view you as belonging to one of three categories -- casual seller, hobbyist or business owner.

Where you report income and whether you can deduct expenses depends on your category. There's no hard line drawn in the sand based on revenue or number of sales dividing these categories -- many factors come into play. In this three part series, we'll tell you what you need to know...

THE CASUAL SELLER

If you sell an item or two from time to time, such as unused sports equipment sitting in your garage, you are a casual seller. (There's no formal designation in the tax law of "casual seller" -- it's a descriptive term.)

Most sales like this will result in a loss -- the price you receive on eBay will be less than what you paid for the item. You are not required to report the loss on your tax return -- you can't deduct it, because it is viewed as a personal loss, and personal losses are not deductible.

On the other hand, if you sell something at a profit -- say, the antique porcelain vase you inherited from your aunt or the collectible child's game you bought at a garage sale -- you must report the gain on your tax return. (Of course, to determine your gain, you'll have to know your basis in an item. If you don't know what your basis is or can't figure it out, then all of the proceeds are considered profit (gain).

Note: You can minimize taxable gain by adding your selling expenses to your basis. Selling expenses include eBay listing fees (the "insertion fees" paid to eBay to post items for sale) and "final value fees" (a percentage of the item's final selling price that is also paid to eBay). These fees are paid by the seller.

There is no threshold amount of gain or number of sales before you are required to report eBay transactions. All gain must be reported on Schedule D. (You can't take capital losses because these are personal items.)

Gains on the sale of items are capital gains -- long-term if the items have been held for more than a year, or short-term if held for a year or less.

However, unlike most long-term capital gains that are taxed at no more than 15%, gains on the sales of collectibles are taxed at 28% for those in income tax brackets of 28% and above.

Collectibles for this purpose are defined in the instructions for Schedule D as works of art, rugs, antiques, precious metals (such as gold, silver, and platinum bullion), gems, stamps, coins, and certain other tangible property.

This concludes Part One. In Part Two we will be covering The Hobbyist.