Online Sales & Tax Law
If you sell an item online, you may receive a profit or a loss. Sometimes the profit or loss will have tax consequences, although this is not always true. The tax rules vary depending on the circumstances surrounding the sale.
People who sell personal use property online through auction websites usually incur a loss because they sell the property for less than what they paid for it. This type of loss does not need to be reported on a tax return and does not qualify for a deduction. If you happen to sell an item of personal use property for a profit, this would need to be reported as income on your tax return.
No Deduction for Hobby Expenses
The Tax Cuts and Jobs Act, which went into effect in 2018, removed several itemized deductions that were previously available to taxpayers. One of these deductions related to expenses involving hobbies. The deductions eliminated by the Tax Cuts and Jobs Act will return in 2026, unless the tax laws change again before then. Through the end of 2025, however, a taxpayer who sells an item that was created or acquired as a hobby must report any profits from the sale as taxable income.
Investors and Online Sales
An investor who sells items online falls into a gray area between an ordinary person and a business. They are driven by a profit motive and tend to sell items that they had previously purchased with the expectation that their value would increase over time. Thus, they likely would receive a gain from an online sale and would need to report that gain on IRS Schedule D. The investor would need to pay tax on the profit at capital gains rates, which are capped at 28 percent for sales of collectibles.
On the other hand, if an investor incurs a loss from the sale of a collectible, they can deduct that loss from any capital gains for that year. If they do not have any capital gains, they can deduct a certain amount of their losses from these sales from other income, and they can apply any remaining losses to future years.
Online Businesses
Some businesses consist of selling services or products online. If this is your business model, you should refer to the business tax section of this site for more information on these types of taxes and related deductions. For example, you may be able to claim a deduction for all of your ordinary and necessary business expenses. You can deduct a business-related loss from your other income. Any profits from your business, unless you are running a C corporation, will pass through to you, which means that you will pay personal income tax on them. You also will need to pay self-employment taxes for Social Security and Medicare if you are running a business.
An online business is defined as an activity in which you regularly engage with the goal of earning a profit. The activity does not need to be full-time or your only source of income. An activity is presumed to be a business if it receives a profit in any three years in a five-year period.
