Sell It on eBay and Pay Uncle Sam
Many people don't realize the income they earn from auctions and consignment sales may be taxable. If you regularly sell items you own, you might be considered a business owner and not even know it. Are you reporting all your income? The Internal Revenue Service (IRS) wants to know. There are also some exceptions where income can be excluded from taxable income.
All income from auctions, traditional or online (such as eBay and Craigslist), and consignment sales is generally taxable unless certain exceptions are met. This income is usually considered either "business" or "ordinary" income. In certain circumstances such income can qualify for the more favorable capital gain treatment.
Business income resulting from an auction or consignment sale is subject to the same taxes as the income of any other retail or service business. That may include income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner must include this income in his or her business income.
A person must report a gain from a sale whether he or she operates a business or not. A reportable gain is the income above the original cost or basis of the item. These gains may be business income or capital gains.
Generally, you are not required to report income resulting from a garage or yard sale. Why? Because the items you sell are usually sold for far less than what you paid for them. If you hold an occasional garage sale, you are not operating a business, so any loss you have is not deductible. However, there may be exceptions. If an online garage sale turns into a business with recurring sales and purchases of items for resale, it may be considered an online auction business.
An occasional sale of an item that has appreciated in value, such as antiques and collectibles may result in a capital gain. If you sell such items, the taxable gain is the excess of the selling price over your cost. This type of income is eligible for the lower capital gain tax rates.
What's a deductible expense? Traditional or online auction and consignment sellers in business to make a profit can generally deduct expenses that are both ordinary and necessary. An "ordinary" expense is one that is common and accepted in a trade or business. A "necessary" expense is one that is helpful and appropriate for a trade or business. Verifiable auction and consignment fees and commissions are examples of allowable business expenses.
Expenses related to personal, living, or family matters are generally not deductible. These are expenses that are part personal and part business-related. The business portion of the expense is deductible. Here's a simple example. A person might borrow $10,000, using $7,000 for personal use and $3,000 for his or her online auction business. The interest expense on the $7,000 is not deductible but the interest on the other $3,000 is.
Another example of an expense that is commonly split when figuring tax deductions is a person's home when it is partially used for business. That person may be able to deduct expenses for the business use of the home if they meet the regular and exclusive use requirement. However, auction and consignment sellers may compute their deduction to the extent of expenses allocable to space in the residence that is used on a regular basis (does not have to be exclusive) to store inventory and/or product samples if the residence is the sole fixed location of the business. Allocable expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
Remember, whether you are operating a business or not, the profits you earn are taxable and the government wants its fair share.
This article is brought to you by Peter Tuttle, CPA. You may contact me by sending an e-mail via the link to the right of the blog page. Please visit my website at http://www.petertuttlecpa.com/
"I help individuals, families, small-businesses & non-profits with their income tax & insurance needs."
IRS Circ 230 disclosure: To ensure compliance w/ rqmts imposed
by US Treasury Regs, we inform you that any tax advice contained
in this communication (including any attachments) was not intended or
written to be used, and cannot be used, for the purpose of (i) avoiding
penalties under the IR Code or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed herein.