Taxes on Ebay Profits?

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Hi Everyone,

I want to share my story and ask a few questions about the tax implications of eBay / Amazon seller account profits. I am a frequent FW fiend and over the course of a few years had some extra tech items that I wanted to sell. I started selling on eBay and on Amazon through their seller accounts and basically my profits grew exponentially. I am at the point of making around 20k profit this year. Here is my problem, I have not yet paid taxes on it, basically becuase I did not anticipate making this much. I have a few questions.

1. If I pay estimated taxes now for the 2005 tax year will I be subject to a tax penalty due to failure to make 4 equal payments?

2. Does eBay or Amazon have a reporting mechanism to report revenue to the IRS?

3. Am I at a greater chance of getting audited if i do report eBay revenue than if I do not report at all? Does the fact that someone sells on eBay raise an IRS red flag?

4. What type of accounting do I need to do for the IRS to show how much I made - right now I am charting it in a spreadsheet - is this okay or do they ask for more?

5. Has this scenario ever happened to other FW members and how have you dealt with the situation?


Thanks for any helpful information you can share.


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forget income tax...<br><br>now CA is aggressively pursuing USE TAX on everything you buy out of state... even a CD on <... (more)

ArbolLoco (Apr. 16, 2006 @ 8:51p) |

ArbolLoco said: <blockquote><hr>forget income tax...<br><br>now CA is aggressively pursuing USE TAX on everything you bu... (more)

truelies (Apr. 16, 2006 @ 9:17p) |

truelies said: <blockquote><hr>ArbolLoco said: <blockquote><hr>forget income tax...<br><br>now CA is aggressively pursui... (more)

plloopp (Apr. 16, 2006 @ 10:56p) |

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keep it and dont worry about it. bigger fish to fry for IRS, they dont have time to waste on 20K. Plenty o folk make 20K month on eBay.

you should also consider paypal. if you have received a certain amount, they will send you a tax statement like any bank account.

Thanks and why the negative rating guys?

I am sure a lot of FW members have to deal with the tax implications of selling stuff online.

everyone is supposed to report their eBay profit. in fact, you need to be more detailed than just listing the profit.

of course, many dont report it at all. what you decide is based on your morals, ethics, audit risk tolerance, etc etc etc

so far I believe eBay is not reporting to the IRS, but they certainly would release records if there was a court order, or perhaps even a simple request by the IRS. eBay has been known to reveal info upon simple fax request from any govt agency (police, FBI, etc) without even a need for court documents

#1. Who the F cares rating your message gets.

#2. Yes, you're supposed to make estimated payments quarterly. However, if this is your first year, you're fine, the IRS understands you just started your "business" and you won't be paying penalties or interest.

#3. It is unlikely your eBay income will fall under the IRS radar - nothing is really reported to the IRS. Nevertheless, remember the old adage about death and taxes - my recommendation is "don't F with the taxman".

#4. Spend $100-$150 and get an accountant to work for you. You'll have to double-check these pencil-pushing dorks but a decent one will help you with the current tax laws and will act as a buffer.

Does any one know if Amazon reports seller's income to the IRS? So far everyone has been talking about eBay's policies.

If you are also employed, you could adjust your employer's withholding to cover your eBay taxable income. Employer withholding (UNLIKE estimated tax payments) are automatically be deemed to be made on time if they're in the right year. You could have zero withheld until the end of the year, then have 100% of your last few paychecks withheld; if the total was enough to cover your liability, you'd escape under-withholding penalties.

if you use paypal, the IRS might find out depending on your sales revenue.


News article
News Article #2

I believe those articles are only talking about using paypal with offshore accounts ...although if they are cooperating on the offshore accounts they probably can cooperate on regular accounts.

bokchim said: [Q]#2. Yes, you're supposed to make estimated payments quarterly. However, if this is your first year, you're fine, the IRS understands you just started your "business" and you won't be paying penalties or interest.
Wrong. There is no such exception for "just starting" a business.

OP - We don't have enough info to tell you whether you fall under one of the "real" exceptions to avoid penalties, but you can determine yourself...Pub 505
If you will be subject to penalties, as LH2004 suggests above, having you employer w/h extra may eliminate or at least minimize the liability.



[Q]#4. Spend $100-$150 and get an accountant to work for you. You'll have to double-check these pencil-pushing dorks but a decent one will help you with the current tax laws and will act as a buffer.
Not sure you actually need an accountant's help as you don't appear to be doing anything even remotely complex, but, if you do engage one, please don't take this guy's negative attitude in with you. Also, don't assume any accountant will act as any "buffer" in dealing with tax authorities.

luder1 said: [Q]if you use paypal, the IRS might find out depending on your sales revenue.


News article
News Article #2yet another reason not to use paypal...

Damm, i knew i shouldnt have linked my offshore CC! <img src="i/expressions/face-icon-small-wink.gif" border=0>

one other thing to consider, if you have this and do not report the income, it is more likely someone who has had a beef with you can file a tax reporting claim. Most states will give the person who reports you a percent of taxes reclaimed. It is a nice way to make money for those who know shady folks.


I often wonder what would happen if someone when and reported all of the eBay power sellers to their local revenue dept. I would imagine a good percentage do not pay taxes, I wonder if a person would get 6 or 7 figures in "reward" money?

duke924 said: [Q]Does any one know if Amazon reports seller's income to the IRS? So far everyone has been talking about eBay's policies.

The short answer is no, in relation to normal IRS compliance. If, however, they are audited or they receive information document requests in regards to some other examination, then they may be compelled to provide the requested information. This method for discovery or other noncompliant taxpayers is quite rare when speaking from an IRS perspective...if, however, you are in a state with an income tax, your odds are much higher that the state level authorities would discover you through information requested from Amzn or E*ay.

You should totally disregard other's posts about the materiality of the amount in question. It's been proven time & again that tax authorities will go after any amount they feel due them and "flying under the radar" based on the amount of unreported income is pure fallacy.

Thanks for the info...why is there a greater chance that the state authorities would find out rather than the federal tax authorities? Also do you know what type of record keeping would be submissible to the IRS as far as my net profit? Right now I have a spreadsheet.

astro26 said: [Q]I often wonder what would happen if someone when and reported all of the eBay power sellers to their local revenue dept. I would imagine a good percentage do not pay taxes, I wonder if a person would get 6 or 7 figures in "reward" money?

It would be highly doubtful one would get anywhere near 6 or 7 figures from any of the states that offer any sort of reward (I'm not sure how many states have such programs in their regulations). It's not as simple as just reporting some random business/individual names...you have to provide some reasonable evidence or proof of noncompliance, not to mention generally having some basis for claim on any "reward". Otherwise, we could all just turn each other in, resulting in a lot of wasted time & effort on everyone's part. I don't recall the law firm, but someone recently tried to lay claim to millions in reward money for "turning in" a bunch of the e-tail operations of some the largest brick & mortars for noncollection of sales taxes in several states. I don't know whether every case has been settled, but I believe the law firm has lost every claim so far & has not collected any money (maybe someone can correct me if I'm wrong).

duke924 said: [Q]Thanks for the info...why is there a greater chance that the state authorities would find out rather than the federal tax authorities? Also do you know what type of record keeping would be submissible to the IRS as far as my net profit? Right now I have a spreadsheet.

It's just a simple matter of odds and the need for additional revenue. There's almost always a higher rate of audits at the state level because you've got more manpower per taxpayer and the states are usually in more dire straits for funds, thus they tend to be more aggressive. States, at least in my experience, are simply more prone to utilize info gathered under audit from one taxpayer to investigate the possibility of auditing another. I don't want to get too deep into this matter, but this is one of the more common reasons behind randomly receiving a nexus questionnaire from a state.

A spreadsheet is just fine for tracking your business, but it's more for your use than the IRS'. For a business your size, it's not so much about the spreadsheet as it is maintaining documentation supporting the numbers you report on your return. While the spreadsheet may help an auditor understand your tax return a little better, ultimately, it will come down to substantiation of your income & expenses...that will come from invoices, receipts, bank records, e*ay records, etc, which will only need to be provided in the event of an audit or information request. Hope that all makes sense.

duke924 said: [Q]1. If I pay estimated taxes now for the 2005 tax year will I be subject to a tax penalty due to failure to make 4 equal payments?

Since your income has been increasing through the year, your penalty will be minimized if you use the annualized method. There is an excellent and inexpensive tool for this at http://edcosoft.com/qitc.html (I have no affiliation, but I was impressed when I looked at it). With today's low interest rates, the underpayment penalty shouldn't be too bad.

eBay taxes = $0

LH2004 said
____________________________________________________________________________________________________
If you are also employed, you could adjust your employer's withholding to cover your eBay taxable income. Employer withholding (UNLIKE estimated tax payments) are automatically be deemed to be made on time if they're in the right year. You could have zero withheld until the end of the year, then have 100% of your last few paychecks withheld; if the total was enough to cover your liability, you'd escape under-withholding penalties.
____________________________________________________________________________________________________

This suggestion is right on the money. Adjust your withholding for your remaining payperiods so that the total amount withheld for the year is at least as much as the total tax liability shown on your 2004 tax return. As long as the total amount withheld = prior year tax liability, there are no penalties or interest. This is one of the allowable exceptions.

TrollMama said: [Q]you should also consider paypal. if you have received a certain amount, they will send you a tax statement like any bank account.

How much do you have to sell before getting a tax statement from Paypal? I have never received a statement from Paypal and I sell year-round.

LH2004 said: [Q]If you are also employed, you could adjust your employer's withholding to cover your eBay taxable income. Employer withholding (UNLIKE estimated tax payments) are automatically be deemed to be made on time if they're in the right year. You could have zero withheld until the end of the year, then have 100% of your last few paychecks withheld; if the total was enough to cover your liability, you'd escape under-withholding penalties.
While the above is absolutely correct, please do not misinterpret the post to mean that you are allowed to have an unjustifiably high number of withholdings claimed on your W4 as long as the total withholdings at the end of the year are close to your overall tax liability. For more information, please see the discussion in this Tax Thread.

I don't know how PayPal would decide on what to report. Certainly not your profits. They have no idea about the price you paid for the item you're selling. For all they know, you could be selling at a loss. To support this, here's an article on this issue from March 2005. Linky

Bottom line is eBay or PayPal won't report to the IRS unless asked to. And IRS probably won't ask unless something triggers an audit and even then according to that eBay spokesperson.

Now if you're audited, IRS will probably find out from your cash flow how much you received. They'll likely ask where that money came from and it'll be your burden to provide them with price you paid for each item, taxes paid, shipping costs and thus how much profit you made on the sales. Depending on how well you kept track of it all, it could mean a world of trouble. Now if you do report profits, this increases your chance of getting audited because the source of those won't be reported on a form that the IRS receives from a banking institution. So be sure you're ready to back up all your claimed profits very accurately.

So if I sell a textbook I used for class on Amazon or E-bay, I'm suppose to pay income taxes?

matt1 said: [Q]So if I sell a textbook I used for class on Amazon or E-bay, I'm suppose to pay income taxes?
Only if you made money on such a sale.

I have few questions :

1> I have goods worth $8000 that I need to sell on eBay.I anticipate profit of $4K
Now how does the profit is taken in to account from IRS stand point of view ? I bought this stuff from various deals posted in HD and all of them has rebates involved in it.
Normal logic states profit = Purchase Price - Rebates - Misc expenses like shipping handelling
Do rebates get consider for calculating profit by IRS ?
2> What is the best strategy to sell item in eBay ? should I register as small business owner and sell it ? I guess in that case I need to charge state sales tax to the buyer ? Note that I already have a full time job.

If you file your profits, make sure to deduct:

price you paid including tax/shipping
mileage to the post office and B&M stores
postage fees
mailing supplies
eBay fees
PayPal fees
internet service charges (% or full?)

Anything else?

dealhunter999 said: [Q]I have few questions :

1> I have goods worth $8000 that I need to sell on eBay.I anticipate profit of $4K
Now how does the profit is taken in to account from IRS stand point of view ? I bought this stuff from various deals posted in HD and all of them has rebates involved in it.
Normal logic states profit = Purchase Price - Rebates - Misc expenses like shipping handelling
Do rebates get consider for calculating profit by IRS ?
2> What is the best strategy to sell item in eBay ? should I register as small business owner and sell it ? I guess in that case I need to charge state sales tax to the buyer ? Note that I already have a full time job.

rebates lower the basis of the item. if you buy a hard drive for 100 there is a 50 rebate then your basis is 50. if you sell for 70, profit is 20. however, deduct eBay and paypal fees to get your real total. if you want to be able to deduct mileage for driving to the post office or pay yourself income, then you register as a small business.

as far as charging sales tax is concerned. the new multi state tax consortium has come out, wish i had a link, that has several states that have adopted a centralized system for collecting income tax. this means that you would be required to collect and pay sales tax in the states you sell. however, i have not read into enough to see how it changes nexus rules regarding sales tax.

geo123 said: [Q]matt1 said: [Q]So if I sell a textbook I used for class on Amazon or E-bay, I'm suppose to pay income taxes?
Only if you made money on such a sale.

Partially true. You also need to factor in depreciation into it. Secondly, the garage sale rule goes into effect. You didn't purchase the book explicitly to sell, so it doesn't really count as income.

Then again, talk to your CPA

tazzy531 said: [Q]Secondly, the garage sale rule goes into effect. You didn't purchase the book explicitly to sell, so it doesn't really count as income.

Huh? The IRS may choose to overlook garage sales, but the law says that capital gains on personal use items are taxable, period.

Given the volume of $$ going through eBay, The IRS will be all over it sooner or later.
so will the state sales tax collectors.

The Pigs follow the $$

In regards to Paypal reporting to the IRS. I believe that poster was referring to the interest paid on money sitting in that account. I think this year, I'll make all of maybe 3 dollars of interest from them. They may not report that income being its below maybe 5 dollars or something. I don't know the number but I doubt they report interest payouts of 75 cents and stuff on every customer who has a paypal account. But just like any bank or savings account, you have to report incomes of interest. Paypal has no way to report your cash flow through them because as another poster said, they don't know what is profit or not, and what they are reporting is profit and all that they KNOW is profit is interest they pay you.

Also, Rebates are not taxable, just as FatCash is not taxable. Possibly because it would be too much hassle to determine who did and didn't get their rebates back, but I'm sure they'd like to know and try to tax it. So if you buy something at 300 dollars and sell it for 225 but did 150 in rebates on it, then pending you subtract fees and such, you have a net loss of 75 bucks on the item and owe no taxes on that.

tazzy531 said: [Q]Partially true. You also need to factor in depreciation into it. Secondly, the garage sale rule goes into effect. You didn't purchase the book explicitly to sell, so it doesn't really count as income.
I believe that you are confusing two things here: whether your activities amount to running a business (the IRS applies a 9 prong test to determine this and profit motive, taxpayer's dependance on the income and businesslike manner are among them) and whether your gains are recognized and are taxable. All individuals, regardless of whether they are deemed to be running a business or not, are required to report their gains to the IRS. So yes, if Matt1 is able to make money by selling a used textbook, that profit is taxable.

IRS May Consider EBay Sales Taxable Income
Is Selling on Ebay a Hobby or a Real Business?
IRS will tax those who earn income from e-Bay

I actually sold the book for less than I paid for it. So I think I don't owe anything?

matt1 said: [Q]I actually sold the book for less than I paid for it. So I think I don't owe anything?

Correct, unless the purchaser (you in this case) deducted the purchase price as a business expense.

Doonie said: [Q]as far as charging sales tax is concerned. the new multi state tax consortium has come out, wish i had a link, that has several states that have adopted a centralized system for collecting income tax. this means that you would be required to collect and pay sales tax in the states you sell. however, i have not read into enough to see how it changes nexus rules regarding sales tax.


What you are referring to is the Streamlined Sales Tax Agreement. SSTA

Without getting into the details, it basically offers a centralized registration process and is intended to make the collection/filing process easier. Once registered, you would be required to collect sales tax in any member state. I believe there are currently 18 member states, but all states have at least begun the process of bringing their regulations into compliance with the SSTA. The main benefit for businesses is the availability of amnesty for any uncollected sales tax prior to registration (as long as you have not been contacted by the state already). This is huge for those companies that have already established nexus in member states, but have not been collecting. It does NOT alter any existing "nexus rules" in any way.

RhizzleBop said: [Q]Also, Rebates are not taxable, just as FatCash is not taxable. Possibly because it would be too much hassle to determine who did and didn't get their rebates back, but I'm sure they'd like to know and try to tax it. So if you buy something at 300 dollars and sell it for 225 but did 150 in rebates on it, then pending you subtract fees and such, you have a net loss of 75 bucks on the item and owe no taxes on that.

No, this is incorrect. Rebates from manufacturers & sellers are decreases in asset basis. See Pub 551

SuperMxyz said: [Q]If you file your profits, make sure to deduct:

price you paid including tax/shipping
mileage to the post office and B&M stores
postage fees
mailing supplies
eBay fees
PayPal fees
internet service charges (% or full?)

Anything else?
If you want to get tricky, you can pay benefits to your employee (say your wife) or yourself (50% writeoff) and use as writeoff against profits. No stated income, so no taxable income. This is where you really get an accountant.

Is n't this a very good reason stop selling on eBay . Do all the hard work PM/coupon/return rebuy and then start worry about filing....tax filing itself killed the deals.
now becaause of this filing your chances of getting audited go high up in the sky.
Now pay CPA



profit-headache-restless nights = loss

Skipping 64 Messages...
truelies said: [Q]ArbolLoco said: [Q]forget income tax...

now CA is aggressively pursuing USE TAX on everything you buy out of state... even a CD on half.com!

oh marron!!!

How can they charge tax on half.com?

See the instructions for line 51 on page 22 of the California Form 540 Instructions.



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