Accounting on Us
If you sell merchandise on marketplace platforms, you might be less sure about what constitutes a business, and what your related tax reporting requirements are.
When do online marketplace sales become a business?
From eBay to Etsy and everything in between
Austin Bradley, CPA
Online marketplaces have expanded far beyond eBay and Craigslist in recent years. We’ve seen the rise of various apps and websites, including Etsy, Amazon, Facebook Marketplace, OfferUp, LetGo and Poshmark, just to name a few. Most of us are familiar with at least a few if not all of those examples, but if you operate on the selling-side of any of these platforms, you might be less sure about what constitutes a business, and what your related tax reporting requirements are.
If the only time you sell on any of these platforms is to de-clutter for spring cleaning, you almost certainly are not engaging in a business activity and are very unlikely to have a reporting requirement. Are you putting some extra cash in your pocket? Sure, but unless you are selling collectible trading cards or something to that effect, your original cost for the items you are selling is almost certainly greater than the amount that you are selling them for now. While the extra cash is nice, at the end of the day you have lost money on the item. But before you get too excited about claiming a loss, you must consider if you are engaged in a trade or business.
What turns casual spring cleaning into a trade or business? Well, as with many things in the tax world, it depends. In all its years of overseeing the United States taxation system, the IRS has never actually defined a “trade or business.” The best they have done is come up with some indicators that might be likely to correlate with the operation of a trade or business. Some of the primary indicators include:
- Carrying on of the activity in a businesslike manner
- Business activities should be considerable, continuous and regular
- Maintenance of complete and accurate books and records
- Whether your time and effort indicate operation with a profit motive
- Whether you have the knowledge and expertise required to carry on the activity as a successful business
These are only a few of the factors, but the general gist is whether or not you engage in the activity on a regular basis, with a profit motive, and in a businesslike manner (i.e. you adjust your operations and strategy in accordance with prior results in order to make a profit.) One important item to note – just because you are not engaged in a trade or business does not necessarily mean that you do not have a reporting requirement. If items you sell are making a legitimate profit, that profit needs to be reported on your tax return. For example, perhaps you sell a rare baseball card that you’ve had since you were a kid for $10,000. You don’t often sell baseball cards, in fact this is the only one you own and only one you intend to sell. Clearly you are not operating a trade or business. In this situation however, you did make a profit, and that profit would need to be reported on your tax return. We won’t get into the weeds of how it should be reported, as that is beyond the scope of this article, but suffice to say if you made a bundle selling an old trading card you may want to consult your tax adviser.
Now that we’ve covered the general concept of what it takes to be considered a trade or business, what are your reporting requirements, and what are some best practices for accurate tax reporting? For most online resellers who operate their business as a “side-hustle”, you will probably be reporting your business activity on Schedule C. In basic terms, that means your business is reported directly on your individual tax return, and a separate business return is not required. However, if you start operating with a business partner, or create any type of corporate entity, you’ll want to check with your CPA to make sure of your specific requirements.
The number one best practice for taxpayers operating an online marketplace business is to maintain accurate records. Keep a record of the prices you purchase your inventory for, the sale prices of inventory, fees charged by the marketplace and miles traveled to and from your sourcing locations (Goodwill, estate sales, etc.). Perhaps you purchased a nice camera to spice up those listing photos, or packaging equipment to save on shipping costs. All this information will make it much easier for you or your tax professional to prepare an accurate tax return and make sure that you are paying the correct amount of tax – not too little, and not too much. If you are operating a trade or business, you should also consider the impact of the new Section 199A Qualified Business Income deduction. At a high-level view, this allows only 80% of your business income to be taxed, rather than the full 100%. There are various requirements and limitations which your tax adviser can help you dig into, but it’s certainly something to be aware of.
If you regularly purchase or handcraft items to resell online, there is a very good chance that you are conducting a trade or business and have a related tax reporting requirement. You might have profits on which you need to pay tax, or you may have deductible losses which can reduce your tax burden. There are many factors that must be considered, and only a tax adviser with your complete tax and financial picture can say for sure what segment you fall into. If this sounds like you, or even if you sell occasionally and aren’t sure whether you have a reporting requirement, I encourage you to reach out to a trusted CPA in order to determine exactly what your situation entails. The significant advent of side-hustles in recent years has not gone unnoticed by the IRS, and you want to make sure you’re on the right side of the reporting requirements.
Feel free to contact your Henry+Horne tax adviser with any questions.