IRS explains tax responsibilities of online auction sellers

As online auctions have exploded in popularity over the years, so too have questions about the federal tax responsibilities of those in the business of buying and selling online. Traditionally, auction rules affected only a relatively small number of taxpayers. But the internet has changed everything, and millions of individuals participate daily on online auction sites, buying and selling a range of items, from everyday household goods to big ticket items like cars.

If you are an online auction seller, you may be subject to income tax, self-employment tax, employment tax, or excise tax. Your sales may also result in capital gains or ordinary business income. In some cases, the income may not be taxable.

Taxable income
In general, all income from auction (including online) and consignment sales is taxable. Income from an auction or consignment sale (which is generally measured by the amount received less basis cost less any depreciation) is usually considered “business” or “ordinary” income. This income is subject to the same taxes as income from any other retail or service business, including federal income and employment taxes. If you are an individual engaged in a retail or service business, you must include this income in your business income.

A non-business person also must generally report gain from an online sale. Likewise, if you sell a product or service online as a hobby, the income you receive is reportable, while your deductible expenses are limited. Your deductions cannot total more than the income reported and may only be taken if deductions are itemized on Form 1040, Schedule A, Itemized Deductions.

Deductible expenses
All auctions sellers – both traditional and online - in business to make a profit can, in general, deduct ordinary and necessary business expenses under Code Sec. 162. An “ordinary” expense is an expenditure that is common and accepted in a trade or business. Examples of ordinary and necessary business expenses include verifiable auction and consignment fees. In contrast, the IRS has stated that expenses related to personal, living or family matters are generally not deductible.

An auction or consignment seller may also be able to deduct expenses for the business use of his or her home. The deduction is computed to the extent of expenses allocable to space in the residence used on a regular basis to store inventory and/or product samples if your residence is the sole (fixed) location of your auction or consignment business.

If you have any questions about your federal (or state) tax obligations as an online (or traditional) auction or consignment seller, please contact Dan Duncan at 630-285-0215.

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