Question

When are sellers from online auction sites required to pay income tax? Please provide and discuss an example.

Answer 1

online sellers, including those selling through online sales websites such as eBay.com and Amazon.com, are responsible for reporting sales income to the Internal Revenue Service (IRS) in their income tax returns. If you're running a business, that's one thing. But what if you're simply selling a few used items through a community message group, just trying to earn a few bucks? It's important to know when you may owe taxes for your online sales.

Online 'Garage Sales'

Online sales of personal, used items do not generally have to be reported. Selling your old bicycle on Craigslist is an example of these types of sales. Losses on personal use property are not deductible on online sellers' tax returns. The rule of thumb is that if you used the items and then sold them for less than you bought them for, then you owe no taxes on the sale. However, if you sold an antique or collectible that had appreciated since you first acquired it, you likely would be on the hook for taxes on the profit.

Determining Whether Sales Are Hobby or Business

Income made from online sales can be reported to the IRS as "hobby income" if the sales activity qualifies as a hobby according to the IRS, i.e. sale without the intention of making money. For example, a recreational photographer selling a photo on eBay should report the sale as hobby income. One test is whether the seller has made no profit from the hobby in two of five consecutive years. If the income does qualify as a hobby income, sellers can deduct hobby expenses from the income but cannot use hobby losses to offset other non-hobby income.

Home-Based Online Auction Sales Businesses

Where there are recurring sales involving purchase of items for resale with the intention of making a profit, sellers may be a small business and are subject to business taxes. For example if you start selling greeting cards online and then begin filling orders from regular clients and continue expanding your online inventory you likely have an online business. Viable online sales businesses are entitled to deduct certain business expenses. If the online sales are part of an established business, the sales should be included as business income.

If you are under this category have to report income as,

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals  is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.

Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.

Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). ALso file the Annual return as per IRS instructions

Reporting Profit on Appreciated Assets Sold Online

Reportable gains on online sales of items such as antiques, art, and collectibles should be reported to the IRS where the sales price is more than the cost of the item. If, for example, you sold a vintage automobile online for a profit, you should report this gain. Depending on the nature of the online sale, the gain may be reported as business income or capital gains.

Reporting Loss on Depreciated Business Assets

Sale of depreciated business assets, such as selling cookbooks on Amazon.com used in a catering business, or closing of the business altogether may require reporting of capital gains, ordinary gains, and depreciation recapture.