You probably don’t have correct information about the tax impact of selling on eBay, or on eBay taxes in general. The right answer depends upon the distinctive nature of your selling activity.
There are three ways to use eBay as a sales avenue. Firstly, you can simply sell items you originally acquired for personal use. This can include property you purchased, inherited, or received as a gift. Selling a first edition of Melville that you bought in 1979 or grandma’s diamond necklace you inherited in 1988 is a lot different than selling items you recently acquired specifically for resale.
When you buy stuff that you plan to sell, you are a trader. Doing this as a hobby is the second type of eBay seller. If you trade often enough, you’re probably engaged in a business activity. That’s the third type of eBay seller.
When considering taxes on eBay sales, don’t think you’re off the hook from owing the US Treasury if you don’t have a business. The Internal Revenue Service considers everything you own as a capital asset. Selling it for a gain is therefore a taxable event. You owe capital gain tax and possibly a lot of it if the item is classified as a collectible for tax purposes.
This means you have to know the acquisition date and cost basis for all of your stuff. The capital gain is the difference between the sale proceeds and the cost basis. So keep track of how much you paid for that 1953 Mickey Mantle baseball card or the toy James Bond spy kit. You even need to know how much Mom paid in 1967 for that Star Trek lunch box you found in the attic. All will be subject to a capital gain tax.
The cost basis for items given to you is a little tricky. If you inherit something, your cost basis is the value on the decedent’s date of death. If it’s something extremely valuable, you might want an appraisal as of that date. Your best chance to obtain a fair market value is from the estate executor. A value is probably listed on the probate papers. It may be worth it to find an expert in the field, to help you with your eBay accounting needs.
When you receive something as a gift from a living person, be sure to obtain the giver’s costs basis. Getting grandfather’s 1964 Mustang as a birthday gift also means obtaining his original $2,100 cost basis. In that case, expect a considerable tax on your eBay sale. But at least you have some basis to subtract from the sale proceeds. Don’t use a zero cost basis just because the property cost you nothing. That just causes you to owe even more capital gain tax.
Don’t bother reporting on your income tax return any losses from selling personal items. Losses on the sale of personal-use property are not deductible. Pay capital gain tax on the items you sell for more than your cost basis and forget about the things you sell for less than cost basis.
The situation is different if – instead of selling property you held for personal use – you sell items on eBay that you purchased for resale. I’ll detail that type of eBay tax in another blog post!
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.