Selling items online has become a popular way for small business owners to generate income. However, many people who engage in more informal selling activities, such as posting items on platforms like Poshmark or Stubhub, may not realize that they could be required to pay taxes on the profits they earn. While these sales may not be a primary source of income, it’s important to understand the tax implications to avoid potential issues with the IRS.
The threshold for owing taxes on income from online sales is $5,000 in 2024. If you exceed this amount, you can expect to receive a 1099-K tax form from the selling platform, which reports your online transactions to the IRS. This form shows the total dollar amount of your online sales for the year. It’s essential to report this income on your tax return, even if you haven’t encountered any problems in the past. The IRS is now cracking down on individuals who fail to report their online sales income.
The rules for reporting income from online sales differ for businesses, hobby sellers, and occasional sellers. If you’re classified as a hobby seller by the IRS, you’re not reselling items with the goal of making a profit. In this case, you would need to disclose any income you receive from online sales, even if you sold the item for less than you originally paid. On the other hand, if you regularly resell items for a profit, you’ll need to report those earnings on Schedule C of your tax return.
The tax treatment for different types of online sales can vary based on what you’re selling and how long you owned the item. Income from a hobby is subject to income tax but not self-employment tax. However, if you’re selling collectible items like comic books or trading cards, you may be subject to capital gains tax. If you owned the item for less than a year, you’ll pay regular income tax on the gain, while owning it for more than a year will result in capital gains taxes.
Reporting online sales on your taxes depends on the nature of your selling activities. Hobby sellers or occasional sellers will report their profits and losses on Schedule 1 of Form 1040. If you have capital gains, you’ll need to file Form 8949 and Schedule D. For more official online sellers with regular earnings, sales must be reported on a business tax return or Schedule C of a personal tax return.
In conclusion, it’s crucial for individuals engaged in online selling activities to understand their tax obligations and report their income accurately to the IRS. Failing to do so could result in penalties and other consequences. If you’re unsure about how to report your online sales income, consider seeking guidance from a tax professional to ensure compliance with tax laws.
