Chicago Tax Lawyer

Understanding the eBay 1099-K

Do you sell stuff on eBay? Don’t forget about possible tax obligations!

Thanks to a new law, more online sellers will be receiving a 1099-K from eBay beginning in 2023. Receiving this form doesn’t always mean that you’ll owe tax, but it does put you—and your eBay sales—on the IRS’s radar.

Read on to learn what this form means and what to do with it!

What Is The EBay 1099-K?

The 1099-K from eBay reports the gross amount of sales you made on the platform during the last tax year. The amount does not include any adjustments such as discounts or refunds, so it may not be the final amount that you report on your tax return.

If you receive this form from eBay, that means it was sent to the IRS as well, so be sure to properly report your income as a seller!

In the past, Form 1099-K was only required for eBay sellers who met the minimum threshold of 200 transactions or $200,000 worth of sales for the year. However, under the American Rescue Plan Act of 2021, the new minimum threshold is $600 worth of sales—which means a lot more eBay sellers are going to start receiving this tax form, and the IRS will have much more information about sellers’ income.

The new eBay 1099 limit applies to transactions made beginning on January 1, 2022.

It’s important to note that while the 1099-K threshold has changed, the tax law has not. Income from eBay isn’t always taxable (we’ll get into more detail below), but taxable income is always reportable regardless of whether you receive a 1099 or not.

Who Doesn’t Need To Report EBay Income?

Do you use eBay like a virtual garage sale, selling a handful of personal items for less than you originally bought them? Then you most likely have nothing to report when it comes to your eBay activity.

If you do make a profit, however, then your selling would likely be considered a hobby and you should pay tax.

Hobby Selling Or Business Income?

Whether you’re making income from a hobby or a bona fide business, the IRS wants to know about it. However, businesses are taxed more favorably than hobbies. This classification will also affect where you report the income from your eBay 1099-K.

If your eBay selling is considered a business, you can write off expenses to decrease your taxable income. Things like the cost of goods and materials, mileage used for the business, and advertising are all ordinary and necessary expenses that could be tax deductible. (See our Top Self-Employed Business Deductions.) In the past, hobbyists could also write off expenses up to a point, but that privilege was removed starting in 2018.

On the other hand, business income is subject to self-employment taxes (approximately 15%), while hobby income is not.

There’s no clear-cut rule defining a hobby vs a business; the IRS looks at a number of facts and circumstances, including:

  • Did you make a profit, or do you have the potential to make a profit?
  • Have you made a profit in at least 3 of the past 5 years?
  • Do you depend on this income?
  • Do you have the skills to succeed in this business?
  • Do you put in the necessary time and effort to make a profit?

Misclassifying your hobby as a business could lead to a tax audit and steep financial penalties. If you’re unsure of your status, give our tax consultants a call!

 

What To Do With Your EBay 1099-K

The 1099-K is a good starting point, but since it only includes gross sales data, it doesn’t have all the information you need. For example, sales tax is included in the amount on your 1099-K, but that shouldn’t be included in your income.

If you receive a 1099-K from eBay and you’re considered a hobbyist, you will need to:

  • Download your Sales Reports for the year to get an accurate report of sales and expenses (such as auction fees) from eBay
  • Report your eBay income on Schedule 1 of Form 1040

If you receive a 1099-K from eBay and you’re considered a business, you will need to:

  • Download your Sales Reports for the year to get an accurate report of sales and expenses (such as auction fees) from eBay
  • Gather receipts or documentation for any additional expenses that you want to write off (for example, the original purchase prices of items you sold for a profit)
  • Report your eBay income and your tax-deductible expenses on Schedule C of Form 1040

We highly recommend using a professional to prepare your tax return if you have income from a 1099-K, especially if you’re claiming business expenses. It will probably save you money! Contact us online or call (312) 471-0126 for help.

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