Courtesy of the most recent email bulletin from ACAT.

Did you hold a garage sale this year to get rid of excess “stuff”?  Or maybe you auctioned items on eBay…or started a home-based business of on-line auction sales?  The IRS has rules and guidelines to follow in reporting your income from these sales.

Did you sell a few personal items on eBay?

If you auctioned a few personal items on eBay and the sale price was less than what you paid for the item (or its depreciated value), you generally do not have to report this income on your tax return.

Did You Have an Online Garage Sale?
If your online auction sales (eBay or some other online service) are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report the sales. In a garage sale, you generally sell household items you purchased over the years and used personally. If you sell the items for less than you paid for them, the sales don’t have to be reported on your tax return. Losses on personal use property are not deductible, either. However, see below for gain reporting.

Did You Sell Appreciated Assets at an Online Auction?
An “appreciated asset” is something that has increased in value with the passing of time.  Examples of appreciated assets often include art, antiques and collectibles. If you have online auction sales of property where the sales price is more than your cost, you usually will have a reportable gain. These gains may be business income or capital gains.

Did You Start a Home-Based Online Auction Seller Business?
If your online garage sale turned into a business and/or you have recurring sales and are purchasing or producing items for resale with the intention of making a profit; you may have started an online auction business.  The sales of these items must be reported on your income tax return.

Are Your Online Auction Sales a Business or a Hobby?
If you regularly purchase or produce items to sell online, you must report the income on your income tax return.  How you report that income depends on whether your online auction sales are considered a “business” or a “hobby.”  The factors to consider in making this determination are discussed at length in IRS publication 535.  In summary, the activity is a hobby if it is done primarily as a recreational activity without a distinct profit motive.  The activity is probably a business if it is carried on in a businesslike manner with a clear profit motive. 

If your online sales constitute a business, the income is reported on Schedule C, Profit or Loss from a Business.  Allowable business expenses are also listed and deducted on the Schedule C, so that only the net profit or loss is included in your adjusted gross income.    

If your online sales are a hobby, your expenses can not exceed the income from the activity, i.e. you may not show a loss.  You may not deduct any expenses at all unless you itemize your deductions on schedule A of your tax return.  In addition, your expenses may be reduced by a percentage of your income. 

Did You Sell Depreciated Business Assets?
If you sell business assets or close your business, you may have capital gains, ordinary gains and depreciation recapture to report. An example is the sale of an automobile used for business.

If you have questions, see your tax professional for details and instructions on your specific situation.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice.  For information on how these general principles apply to your situation, please consult an accounting or tax professional.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2008 01:47:00 PM Send this post: