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Regardless of the outcome of the Internet taxation debate, income generated from selling items on online auction sites is well within the jurisdiction of the IRS. As auction sites continue to grow in popularity and activity, they?re sure to be monitored more closely. Following are some issues to keep in mind when filing your Individual Income Tax Return (Form 1040).
- According to the IRS, ?The fact that items are sold in an online auction does not change the character, or the tax treatment of the transaction.? Also, ?the frequency?and the dollar amounts of the transactions are not?determining factor[s] in the treatment of the transactions.?
- If the item auctioned was purchased for investment purposes (e.g., a collectable), all profits from its sale ? no matter how small ? should be reported as capital gains on Schedule D.
- If the item auctioned was ?purchased for resale to customers, as in inventory of a business,? the transactions surrounding it are ?considered the operation of a business? and profit from its resale is considered income. This profit does not qualify as capital gains and should be reported as ordinary income.
- Online auction expenses are deductible if they exceed two percent of your income and are itemized as miscellaneous deductions.
- You can deduct expenses below the two percent cutoff if you file your online auction activity as a business on Schedule C or C-EZ.
- Once you exceed $400 a year in profits, you are considered self-employed by the IRS and must pay self-employment tax (figured on Schedule SE).
To make sure you?re not paying more taxes on your online auction income than you should, keep records of:
- how much you paid for the item you?re auctioning or how much it cost to make it.
- how much it cost to auction the item (i.e., Internet services, fees).
- how much you were payed for the auctioned item.
- what you paid for shipping the item.
Careful documentation of these expenses and profits will ensure you?re deducting and being taxed correctly.
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Source: http://themodernaccountant.com/2012/09/05/taxing-online-auctions/
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